Which combinations of statements is correct about ratio analysis?

A. Ignore price level changes

B. Does not enable SWOT analysis

C. Helps in comparative analysis

D. Reflects price level changes

E. Incorporate Non-monetary aspects

Choose the correct answer from the options given below.

A and C only

The correct answer is option (2) : A and C only.

Ratio analysis is a technique used to evaluate the financial performance of a company by analyzing the relationships between various financial variables in its financial statements.

A. Ignore price level changes: This statement is correct. Ratio analysis typically focuses on relative proportions and relationships between numbers rather than absolute values, so it often ignores changes in the general price level. The financial accounting is based on stable money measurement principle. It implicitly assumes that price level changes are either non-existent or minimal. But the truth is otherwise. We are normally living in inflationary economies where the power of money declines constantly. A change in the price-level makes analysis of financial statement of different accounting years meaningless because accounting records ignore changes in value of money.

B. Does not enable SWOT analysis: This statement is incorrect. Ratio analysis can be a valuable tool in assessing a company's strengths and weaknesses, which are key components of SWOT analysis.

C. Helps in comparative analysis: This statement is correct. Ratio analysis involves comparing different financial variables over time or against competitors to assess performance and identify trends.

D. Reflects price level changes: This statement is incorrect. As mentioned earlier, ratio analysis usually focuses on relationships and proportions, not absolute values affected by price level changes. The financial accounting is based on stable money measurement principle. It implicitly assumes that price level changes are either non-existent or minimal. But the truth is otherwise. We are normally living in inflationary economies where the power of money declines constantly. A change in the price-level makes analysis of financial statement of different accounting years meaningless because accounting records ignore changes in value of money.

E. Incorporate Non-monetary aspects: This statement is incorrect. Ratio analysis primarily deals with financial numbers and may not directly incorporate non-monetary aspects. Accounting provides information about quantitative (or monetary) aspects of business. Hence, the ratios also reflect only the monetary aspects, ignoring completely the non-monetary (qualitative) factors.