Discuss the limitations associated with using accounting data to measure competitive performance.
What will be an ideal response?
Although accounting data tend to be readily available and we can easily transform them into financial ratios to assess and evaluate competitive performance, they also exhibit some important limitations:
All accounting data are historical data and thus backward-looking. Accounting profitability ratios show us only the outcomes from past decisions, and the past is no guarantee of future performance. Also, there is a significant time delay before accounting data become publicly available.
Accounting data do not consider off-balance sheet items. Off-balance sheet items, such as pension obligations (quite large in some U.S. companies) or operating leases in the retail industry, can be significant factors.
Accounting data focus mainly on tangible assets, which are no longer the most important.
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