GCE Accounting 2024 Theory — Question 8

Model answer

1. An accounting ratio is only an indicator of a problem, not a solution; it does not explain what should be done to rectify the situation. 2. Accounting ratios can paint a misleading picture if considered in isolation; a comprehensive set of related ratios should be analysed together. 3. Lack of standardisation: there are no universally accepted standards for what constitutes a "good" or "bad" ratio, as this varies with industry norms, company size and economic conditions.