Answer (A) is correct . In ratios that relate the income statement to the balance sheet (e.g., inventory turnover, asset turnover, receivables turnover, and return on assets), the balance sheet figure should be an average. The reason is that the income statement amounts represent activity over a period of time. Thus, the balance sheet figure should be adjusted to reflect assets available for use throughout the period.
Answer (B) is incorrect because The income statement amount is a single figure for an entire year; there is nothing to average.
Answer (C) is incorrect because Traditional financial statements and the ratios computed from the data they present are mostly stated in historical cost terms.
Answer (D) is incorrect because Comparison is the purpose of ratio usage. All ratios are meaningless unless compared to something else, such as an industry average.
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