The financial statement analysis framework is a generic term used to describe the process by which analysts take steps to assess financial statements, supplemental information and other sources of information in order 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
There are 6 main steps involved in the financial statement analysis framework. These include:
- Articulating the purpose and context of the analysis: This step guides further decisions about the approach, the tools, the data sources, and the format in which the final report will be made. It also defines the target audience, end product, and timeframe, as well as identifies any resources and resource constraints. After this, the analyst should be able to compile the specific questions which are to be answered by the analysis.
- Collecting input data: In this step, the analyst gathers the data necessary 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, which will allow for better understanding of the company’s business, financial position and financial performance.
- Processing data: In this step, the analyst processes the data that was collected in step 2 using various analytical tools. This may involve computing financial ratios and growth rates, creating charts, preparing common-size financial statements, or performing statistical analysis such as regression analysis.
- Analyzing and interpreting the processed data: The analyst assesses the data that was processed in step 3 and should be able to interpret the output of the analysis as well as use it to support a conclusion or recommendation.
- Developing and communicating conclusions and recommendations: The analyst should communicate the conclusion and recommendation derived from the analysis in an appropriate format which answers the questions that were posed in step 1.
- Doing follow-up: The analyst should perform periodic reviews in order to determine if the initial conclusions and recommendations still hold true. This may require a repeat of all the previous steps on a periodic basis.
In which step of the financial statement analysis framework would performing sensitivity analysis most likely be involved?
A. Collecting input data
C. Processing data
The correct answer is C.
Performing sensitivity analysis would be considered a way of processing the data that has been collected.
Reading 19 LOS 19f:
Describe the steps in the financial statement analysis framework