Limitations of Cross-Business Ratio Comparisons

Steps:

• Accounting ratios enable performance evaluation but require comparable, representative data.
• Common limitations include inconsistent policies, scales, or non-typical periods affecting validity.
• Assess options: A and C imply policy uniformity, aiding rather than hindering comparison.
• Identify D as the true limitation due to potential data distortion from unusual years.

Why D is correct:

• Ratios rely on data from normal operations for accurate benchmarking; atypical years (e.g., via economic shocks) violate this principle in financial analysis, yielding unreliable comparisons.

Why the others are wrong:

• A: Identical policies standardize metrics, facilitating fair ratio comparisons.
• B: Varying sales prices indicate market differences but ratios (e.g., profit margins) normalize such factors for analysis.
• C: Same as A; policy consistency enhances comparability, not limits it.

Final answer: D