Principles of Expense Recognition
The IASB Conceptual Framework defines expenses as reductions in economic benefits occurring throughout... Read More
The primary goal of financial statement analysis is to assess a company’s past, present, and potential future performance and financial condition. This involves using the company’s financial reports, along with other relevant information, to make informed investment, credit, and other economic decisions.
Within a company, managers use financial analysis to inform their operating, investing, and financing decisions. However, they do not rely solely on financial statement analysis, as they also have access to nonpublic financial data.
However, analysts generally have a particular economic decision in mind, which may include:
- Assessing an equity investment for inclusion in a portfolio.
- Valuing a security to make an investment recommendation to others.
- Evaluating a company’s creditworthiness to decide whether to extend a loan and under what terms.
- Assigning a debt rating to a company or bond issue.
- Deciding on a venture capital or other private equity investment.
- Evaluating potential merger or acquisition candidates.
Question
Which of the following best describes the role of financial statement analysis?
- To determine whether a company should close its operations.
- To provide information on a company’s financial performance and position.
- To use a company’s financial reports to evaluate its past, future, and potential performance.
Solution
The correct answer is C.
In financial statement analysis, a company’s financial reports are used to evaluate its past, future, and potential performance.
A is incorrect because financial statement analysis does not only provide information on whether a business should close its operations, but also how profitable it is, its financial ratios, etc.
B is incorrect because it describes the role of financial reporting and not financial statement analysis.
Start Free Trial
Strengthen your CFA Level I Financial Reporting and Analysis preparation with exam-style questions, QBank drills, and full mock exams designed to help you interpret financial statements and apply analytical frameworks under exam conditions.
Sergio Torrico
2021-07-23
Excelente para el FRM 2
Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé
AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
diana
2021-07-17
So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts.
The fun light-hearted analogies are also a welcome break to some very dry content.
I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
Kriti Dhawan
2021-07-16
A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them.
Thank you ! Grateful I saw this at the right time for my CFA prep.
nikhil kumar
2021-06-28
Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
Marwan
2021-06-22
Great support throughout the course by the team, did not feel neglected
Benjamin anonymous
2021-05-10
I loved using AnalystPrep for FRM.
QBank is huge, videos are great.
Would recommend to a friend
Daniel Glyn
2021-03-24
I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
michael walshe
2021-03-18
Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.