Why do differences in the accounting practices of firms

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Why do differences in the accounting practices of firms limit the usefulness of financial ratios?

1. Accounting practices differ widely among firms. For example, different firms choose different methods to depreciate their fixed assets. Differences such as these can make the computed ratios of different firms difficult to compare.

2. Financial ratios can be too high or too low relative to the industry average for a reason. These include differences in business models.

3. Many firms experience seasonal changes in their operations. As a result, their balance sheet entries and their corresponding ratios will vary with the time of year the statements are prepared.

Reference no: EM132799528

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