Factors Affecting Financial Statement Comparison

C

All of these responses would affect the comparison of financial statements across two different firms.

To answer this question, let's analyze each option and its impact on the comparison of financial statements across two different firms:

I. Different accounting principles: Different accounting principles refer to the use of different sets of rules and standards to prepare financial statements. For example, one firm may follow International Financial Reporting Standards (IFRS), while another firm may follow Generally Accepted Accounting Principles (GAAP). When comparing financial statements between firms that use different accounting principles, it becomes challenging to make accurate and meaningful comparisons. Accounting principles can dictate how transactions are recorded, which items are recognized as assets or liabilities, and how revenues and expenses are recognized. Therefore, different accounting principles can distort the comparability of financial statements. Hence, option I affects the comparison of financial statements across two different firms.

IV. Different industries: Different industries can have unique characteristics and operating models that affect financial statement presentation. For example, a manufacturing company may have different cost structures, inventory valuation methods, and revenue recognition policies compared to a service-based company. These differences arise due to the nature of the industry, the type of assets involved, and the specific risks and challenges faced. Therefore, comparing financial statements across different industries may not provide meaningful insights, as the factors influencing financial performance and ratios can vary significantly. Hence, option IV affects the comparison of financial statements across two different firms.

II. Different accounting estimates: Accounting estimates involve making judgments and assumptions about uncertain events or transactions, such as the useful life of an asset, the collectability of receivables, or the fair value of an investment. Different firms may use different estimates based on their management's judgment and interpretation of available information. These estimates can affect the reported amounts in the financial statements, such as depreciation expense, bad debt provision, or fair value adjustments. When comparing financial statements between firms with different accounting estimates, the variations in these estimates can impact the comparability of the financial information. Hence, option II affects the comparison of financial statements across two different firms.

III. Different reporting periods: Different reporting periods refer to financial statements prepared for different time periods. Companies typically prepare financial statements annually, but they may also issue quarterly or semi-annual statements. Comparing financial statements from different reporting periods can lead to inaccurate conclusions, as financial performance can change over time due to various factors. For example, comparing a firm's financial statements from 2018 with another firm's financial statements from 2020 may not provide relevant insights because economic conditions, business strategies, and other factors could have changed significantly between those periods. However, this option does not explicitly affect the comparison of financial statements across two different firms.

Based on the analysis above, we can conclude that options I, II, and IV affect the comparison of financial statements across two different firms. Therefore, the correct answer is option C: I, II, III, and IV.