Question

Which statement about a ratio calculated in the analysis of financial statements is true?

a) it shows the dollar increase from one year to another.
b) it expresses a mathematical relationship between two numbers.
c) it is meaningful only if the numerator is greater than the denominator.
d) it restates all items on a financial statement in terms of dollars of the same purchasing power.

Answer 1

A ratio in financial analysis expresses a mathematical relationship between two numbers, not an increase over time, nor is it only meaningful if the numerator is greater than the denominator, nor does it restate financial items in terms of constant purchasing power.

Step-by-step explanation:

The correct statement about a ratio calculated in the analysis of financial statements is b) it expresses a mathematical relationship between two numbers. Ratios are used in financial analysis to provide insights into a company's performance, liquidity, profitability, and other aspects by comparing two related figures from financial statements. Unlike a single absolute value, ratios show how one number relates to another, which can help compare companies of different sizes or across different industries.