Question : Choose the correct statement
Statement 1: In order to interpret financial statements in a useful way, ratio analysis involves a comparison that provides a good interpretation of the financial statement.
Statement 2: An individual ratio by itself cannot determine if a position is favorable or unfavorable. It should be compared to another company in the same industry or to previous ratios of the same company.
Option 1: Statement 1 is correct, Statement 2 is wrong
Option 2: Statement 2 is correct, and Statement 1 is wrong
Option 3:
Both Statements are correct
Option 4: Both Statements are wrong
Correct Answer:
Both Statements are correct
Solution :
Ratio analysis is a helpful way to interpret financial statements. And, an individual ratio by itself cannot determine if a position is favorable or unfavorable. It should be compared to another company in the same industry or to previous ratios of the same company.
Hence, the correct option is 3.
