Why do differences in the accounting practices of firms limit the usefulness of financial ratios?

What will be an ideal response?

1. 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.
2. Financial ratios can be too high or too low relative to the industry average for a reason.
3. Many firms experience seasonal changes in their operations. As a result, their balance sheet entries and their
corresponding ratios will vary with the time of year the statements are prepared. To avoid this problem, an average
account balance should be used (one calculated on the basis of several months or quarters during the year) rather than
the year-end account balance.