When comparing a firm to its peers, why is it difficult to determine the industry to which the firm belongs?

Why should you be careful when comparing a firm with industry norms?

What will be an ideal response?

1. It is sometimes difficult to determine the industry to which a firm belongs when the firm engages in multiple lines
of business. In this case, you must select your own set of peer firms and construct your own norms.
2. Published peer group or industry averages are only approximations. They provide the user with general
guidelines, rather than scientifically determined averages of the ratios for all, or even a representative sample, of the
firms within an industry.
3. An industry average is not necessarily a desirable target ratio or norm. There is nothing magical about an industry
norm. At best, an industry average provides an indication as to the financial position of the average firm within the
industry. It does not mean it is the ideal or best value for the ratio. For various reasons, a well-managed company
might be above the average, whereas another equally good firm might choose to be below the average.
4. Accounting practices differ widely among firms. For example, different firms choose different methods to
depreciate their fixed assets. Differences such as these can make the computed ratios of different firms difficult to
compare.