Two Firms in the Same Industry Are the Same Size

question 31

Multiple Choice

Two firms in the same industry are the same size and have very similar real-world financial results. Which of the following describes the profitability ratios of these firms?

• A) They could be very different because ratios are based on projections of future performance rather than on actual real-world performance.
• B) They should be identical because regulations require all firms in the same industry to use the same accounting methods to construct their financial statements and compute their key financial ratios.
• C) They should be very similar because both firms must use exactly the same mathematical formulas to calculate their ratios.
• D) They could be different if they used approved but dissimilar methods to construct their financial statements.

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Definitions:

Heredity

Inborn traits or characteristics inherited from the biological parents.

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A deviation from the normal chromosome number or structure in cells, often leading to genetic disorders or syndromes.