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A Limitation of Using Industry Norms in Financial Performance Evaluation

question 35

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A limitation of using industry norms in financial performance evaluation is that some companies in the same industry may not be comparable.


Definitions:

Incremental Borrowing Rate

The interest rate a lessee would have to pay to borrow on a collateralized basis over a similar term the funds necessary to lease an asset.

Lessor's Implicit Interest Rate

The interest rate in a lease agreement that, when applied to the minimum lease payments, causes the present value of those payments to equal the fair value of the leased asset.

Present Value Factor

A formula used to calculate the present value of a sum of money to be received in the future, taking into account the time value of money.

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