Final answer:
When comparing entity ratios with industry ratios, one should not assume consistency in accounting methods, understand that point-in-time values may have limitations, and should compare trends over time rather than single year comparisons. It's important to perform these comparisons while also considering the different accounting policies that can affect the financial ratios.
Step-by-step explanation:
When comparing an entity's financial ratios with industry ratios, it is important to note that assumptions should not be made regarding the consistent application of alternative accounting methods. Each company might use different accounting policies, and these differences can impact financial ratios, creating challenges in direct comparison.
The statement that relative values at a point in time may not be significant acknowledges that financial ratios are snapshots of a company's financial condition at a single point in time and may not fully represent its long-term performance or trends.
Furthermore, it is beneficial to compare the trend of entity ratios to the industry ratio trends over time, rather than just the current year's industry ratio, to get a more accurate view of the company's performance relative to the industry.
Contrary to one of the propositions, entity ratios should indeed be compared with industry ratios to gauge a company's performance against its peers, although caution must be exercised to take into account differences in accounting practices and the limitations of single-point-in-time comparisons.