Which of the following reduce the usefulness of ratio analysis when comparing entities that operate in the same industry? Select ALL that apply.

The usefulness of ratio analysis for inter-entity comparison is fundamentally dependent on the principle of comparability. Factors that violate this principle reduce the analysis's value.

(A) Aggregated revenue from diverse activities obscures the performance of core operations, making it difficult to compare with a more focused competitor.

(B) and (D) Different accounting policies and estimates (e.g., depreciation methods, asset revaluation) result in financial figures that are not calculated on a like-for-like basis, distorting comparative ratios like ROCE or profit margins.

(E) Ratios are based on historical data, which may not reflect current economic realities or asset values, especially during periods of high inflation, making comparisons between firms with assets of different ages misleading.

C. Separate disclosure of a material and unusual item increases the usefulness of ratio analysis, as it allows an analyst to adjust the figures to calculate underlying performance for a more meaningful comparison.

F. The fact that ratios are quick and easy to calculate is an advantage or a characteristic of the technique; it does not inherently reduce the usefulness of the comparison itself.

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1. CIMA Official Study Text

F2 Advanced Financial Reporting. (2019). Chapter 4: The Regulatory and Conceptual Framework

Section 3.4

'Limitations of Financial Ratios'. The text explicitly states that a primary limitation is the lack of comparability arising from firms using different accounting policies (e.g.

depreciation

valuation of non-current assets) and the distorting effect of historical cost accounting in an inflationary environment. It also notes that diversification can make comparisons with specialist companies difficult.

2. Stickney

C. P.

Brown

P. R.

& Wahlen

J. M. (2007). Financial Reporting

Financial Statement Analysis

and Valuation: A Strategic Perspective (9th ed.). Thomson South-Western. In Chapter 6

'Profitability Analysis

' the authors detail the challenges in ratio analysis

highlighting that "differences in accounting methods used by firms can adversely affect the comparability of their ratios" (p. 312). They specify depreciation methods and asset valuation as key examples.

3. Penman

S. H. (2013). Financial Statement Analysis and Security Valuation (5th ed.). McGraw-Hill Education. In Chapter 7

'The Analysis of Financial Ratios

' Penman discusses the "Problem with Accounting Analysis

" stating

"Different accounting methods for similar circumstances reduce the comparability of ratios across firms... A firm revaluing its assets will report a lower return on assets than one that does not" (pp. 245-246).

4. Whittington

G. (2008). 'Harmonisation or Discord? The Critical Role of the IASB Conceptual Framework'. European Accounting Review

17(2)

235-242. https://doi.org/10.1080/09638180802019114. This article discusses how the conceptual framework aims to enhance comparability

implicitly acknowledging that a lack of it (due to policy choices like revaluation vs. historical cost) is a major impediment to useful financial analysis.