Analyses of financial statements
Comparing the company’s financial ratios as a basis of making operational decisions may be misleading hence adversely impactful to an organization. The decision by some companies to consider the financial ratios of other similar organizations in the industry may not translate to favorable implications to the firm as expected by the management team. Distinct considerations are proving that such a move may be misleading hence detrimental to an organization’s market performance.
The fact that firms in the same industry may opt to utilize different techniques in their accounting procedures is one of the factors evidencing that the move may be misleading. Even though firms in the same industry may apply specific correlating leadership approaches, variance in accounting techniques can lead to unreliable information when analyzing market performance. For example, assumptions and estimates made by individual companies may influence their accounting outcomes.
As such, the assumptions and estimates made during the computation of the financial ratios may mislead other companies, which may consider the data as a basis of their decision making. For example, small companies may adopt different considerations when formulating their accounting information as opposed to big firms. This is because small companies are only considerate of current liabilities and assets as opposed to established firms, which may consider market value ratios (Rojas et al., 2017). Such variations in the primary consideration when computing accounting ratios may affect the inventory values.
In summary, a comparison of the financial ratios adopted by other firms in the industry may be misleading when formulating accounting computations. Firms utilize different techniques and make varying assumptions when making their computation. Such assumptions and variance in techniques affect the inventory values, thus making it unreliable for other companies to consider such information to facilitate the account ting processes.
Rojas, D., Cueva, D. F., Armas, R., & Matailo, L. (2017). Working Capital in Small and Medium Enterprises in Ecuador. Advanced Science Letters, 23(8), 7981-7983.