Ratio Analysis Financial Accounting

In conjunction with the correctly applied underlying business data ratios allow better comparability and understandability and furnish more rapid evaluation, better perspective of overall business condition, past, present and possible future performance as well as comparison to industry benchmarks and other businesses in the same industry. Further adaptation and introduction of fair value based accounting principles on international scale will lead to improved and more relevant market based recognition of assets and liabilities as well as increased transparency.

The application of ratio analysis may lead to erroneous conclusions especially if trends or comparisons are developed from financial statements based on the two different accounting principles or if mixed attributes are utilized in statements. As a general rule the user has to be aware that a ratio provided can at best only be as useful and reliable as the underlying data and should only be used for decision making in conjunction with actual statements including relevant disclosure, and good judgment.

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Despite the presence of strict regulations for the provision of financial information to external users and the ubiquitous use, benefit as well as impact of analysis based on ratios it is of note that only a single (FASB and IASB) standard regulating a ratio -earnings per share is in effect since 1969 including updated standards for basic and diluted EPS (IAS 33) (2. ). This suggests that data presented in the form of ratios may lack necessary reliability and/or relevance which may open the potential not solely for unintentional misstatement but also for misrepresentation.