How can financial ratios be influenced?

Financial ratios are influenced significantly by specific accounting rules and practices because these rules dictate how financial transactions are recorded and reported in financial statements. Different accounting methods and principles can lead to substantial variations in the calculation of ratios, impacting the analysis and conclusion drawn from them. For instance, the choice between using the cash method versus the accrual method of accounting can alter revenues and expenses reported on the financial statements, thus changing profitability ratios and other key financial metrics.

While stock market fluctuations, investor sentiment, and labor market conditions can affect a company's performance and prospects, they do not directly alter the underlying financial data used to calculate ratios. Therefore, these external factors may influence investor perception and market value but do not change the ratios themselves. The accounting framework within which a company operates is what shapes the depiction of its financial health through ratios, making specific accounting rules and practices the correct answer in this context.