“Ratio analysis is indispensable part of interpretation of results revealed by the financial statements.” Which of the following is not an objective of Ratio Analysis?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → To forecast consideration of non-financial factors.
The question asks for the one item that is not an objective of ratio analysis. Ratios are worked out from the financial statements alone, so they cannot take non-financial factors into account. That is one of their limitations: a forecast based only on ratios needs those factors to be considered separately. Option (4) turns this limitation into an objective.
Option (1) To know about the potential areas which can be improved with the effort in the desired direction. — An objective of ratio analysis. Ratios show where the business is doing well and where effort can lift results.
Option (2) To know the areas of the business which need more attention. — An objective of ratio analysis. A weak ratio points to the area that needs investigation.
Option (3) To provide information derived from financial statements useful for making projections and estimates for the future. — An objective of ratio analysis. Past ratios are a base for estimates of the future.
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