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The Financial Statement Analysis Framework

The Financial Statement Analysis Framework

The financial statement analysis framework is a generic term used to describe the process in which analysts assess financial statements, supplemental information, and other sources of information. Essentially, financial statement analysis framework helps analysts to draw conclusions and make informed recommendations such as whether or not to invest in a company or extend a loan to it.

Steps Involved in the Financial Statement Analysis Framework

Financial statement analysis framework involves six steps. These include:

  1. articulating the purpose and context of the analysis: this step guides further decisions about the approach, tools, data sources, and the format which the final report will assume. It also defines the target audience, end product, and timeframe. Further, it identifies the requisite resources and resource constraints. After this, the analyst should be able to compile the specific questions which are to be answered by the analysis;
  2. collecting input data: in this step, the analyst gathers the necessary data to answer the specific questions that were compiled in step 1. This may include obtaining information on the economy and industry within which the company operates. Such data will allow a better understanding of the company’s business, financial position, and financial performance;
  3. processing data: in this step, the analyst processes the data that was collected in step 2 using various tools of analysis. This may involve computing financial ratios and growth rates, creating charts, preparing common-size financial statements, or performing statistical analyses such as regression analysis;
  4. analyzing and interpreting the processed data: the analyst assesses the data that was processed in step 3. The analyst should be able to interpret the output of the analysis as well as use it to support a conclusion or recommendation;
  5. developing and communicating conclusions and recommendations: the analyst should communicate the conclusion and recommendations derived from the analysis in an appropriate format that answers the questions that were posed in step 1; and
  6. doing follow-up: The analyst should perform periodic reviews to determine if the initial conclusions and recommendations still hold. This may require a repeat of all the previous steps periodically.

Question

In which step of the financial statement analysis framework would performing sensitivity analysis most likely be involved?

  1. Follow-up.
  2. Processing data.
  3. Collecting input data.

Solution

The correct answer is B.

Performing sensitivity analysis would be considered a way of processing the data that has been collected.

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