Financial Reporting and Financial Statement Analysis

Financial reporting and financial statement analysis are two very important terminologies in finance which describe how a company’s financial performance is made known to persons outside the company and how this performance is assessed and used to make economic decisions.

The Role of Financial Reporting

Financial reporting provides information on a company’s performance, its financial position, as well as changes in its financial position. It usually takes the form of interim financial statements, audited financial statements, management discussion and analysis, and additional disclosures as required by the company’s regulators.

The Role of Financial Statement Analysis

In financial statement analysis, a company’s financial reports and other related information, such as financial notes and supplementary schedules, are assessed and used to evaluate the company’s performance and financial position in order to make an investment or other economic decision.

Financial statement analysis can be used to determine if a company is profitable, adequately capitalized, able to meet its long and short-term obligations, and able to generate positive cash flows on an ongoing basis. It also allows analysts to form estimates or expectations of a company’s future performance and financial position.

Question

Which of the following best describes a role of financial statement analysis?

A. To provide information on a company’s financial performance and position.

B. To use a company’s financial reports to evaluate its past, future, and potential performance.

C. To determine whether a company should close its operations.

Solution

The correct answer is B.

In financial statement analysis, a company’s financial reports are used to evaluate its past, future, and potential performance.

Option A is incorrect because it describes the role of financial reporting and not financial statement analysis.

Option C is incorrect because financial statement analysis does not only provide information on wether a business should close its operations, but also how profitable it is, financial ratios, etc.

Reading 21 LOS 21a:

Describe the roles of financial reporting and financial statement analysis

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