discussion 2 fin 534

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Analysis of Financial Statements

Please respond to the following:

  • Determine why it is sometimes misleading to compare a company’s financial ratios with those of other firms that operate within the same industry. Support your response with one (1) example from your research.

i will need a response to a student also this is the student response

Danielle Debardelaben

RE: Week 2 Discussion

COLLAPSE

  • Sometimes it can be confusing to compare a company’s financial ratios with other firms that operate within the same industry because each may use different accounting methods.
  • Accounting information used in calculation of ratios is affected by the estimates, assumptions and diverse accounting methods used by companies.
  • For example, a small company cares more about its ratios emphasis on current assets and liabilities instead of market value ratios.
  • For example, a company that uses the FIFO method to value its inventory will have a higher inventory value compared to the company that uses LIFO.
  • Ratios calculated from this type of data vary and provide false information when used to compare the two companies even if they operate in the same industry.
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