Question

Financial ratios: help financial statement users to evaluate the financial characteristics of companies by putting the large dollar amounts reported in financial statements into relative terms for comparison purposes. Which of the following statements is true?

1) help financial statement users to evaluate the financial characteristics of companies by putting the large dollar amounts reported in financial statements into relative terms for comparison purposes.
2) Both of these statements are true.
3) Neither of these statements is true.
4) provide for a more meaningful analysis when the trends of financial ratios for a company are compared to the industry average trends over a period of time.

Answer 1

Financial ratios are vital tools for assessing a company's financial characteristics, and statement 4 is true as it underscores the importance of trend comparison with industry averages.

Step-by-step explanation:

The question pertains to the usefulness of financial ratios in evaluating the financial health of a company. Financial ratios are indeed critical tools that help users of financial statements to understand a company's financial characteristics by expressing large dollar amounts in relative terms, facilitating company-to-company comparisons.

Statement 4 is correct because it emphasizes the importance of comparing a company's financial ratio trends to industry averages over time, which provides a more meaningful analysis of the company's performance.