What precautions should be taken before using Ratio Analysis as a technique for interpretation of financial statements?
- Reliability of the financial statements should be checked first as the ratio analysis is based on financial statements.
- It should be computed on the basis of inter related figures which have cause and effect relationship.
- The impact of inflation should be considered before computing the ratios.
- Determination of proper Standards
- Revision and Alteration
- Proper comparison
- Use of other methods with ratio analysis for accurate interpretation
- Proper recording should be done