Converged Accounting Standards for Rev ...
In May 2014, the IASB and FASB issued converged accounting standards which aim... Read More
Generally, analysts aim to assess a company’s current and past performance and financial position. Consequently, they can leverage these findings to shape future expectations regarding the company’s financial position and performance, as well as factors impacting the risk profile of the company.
For instance, performance 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 continuously.
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.