Answer
Ratio analysis can contribute to inaccuracies in performance measurement because they are computed using historical costs. Accordingly, the ratios may lack fair value details. Besides, the credibility of ratios may be hampered when there are significant estimations like the estimations depreciation. Moreover, the comparability of ratios within particular industries is problematic, given that the ratios are based on divergent accounting principles. Furthermore, other details, such as external factors relating to technology and industry changes, are excluded from financial statements; thus, they are not considered during the computation ratios.
Work Step by Step
Ratio analysis can contribute to inaccuracies in performance measurement because they are computed using historical costs. Accordingly, the ratios may lack fair value details. Besides, the credibility of ratios may be hampered when there are significant estimations like the estimations depreciation. Moreover, the comparability of ratios within particular industries is problematic, given that the ratios are based on divergent accounting principles. Furthermore, other details, such as external factors relating to technology and industry changes, are excluded from financial statements; thus, they are not considered during the computation ratios.
