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CFA Level I Exam · Introduction to Financial Statement Analysis

Role of Financial Statement Analysis for CFA Level I

Updated 7 October 2026 · Fact-checked

Financial statement analysis is the use of a company's reported financial information to evaluate its past performance and financial position and to forecast its future. Analysts use it to support decisions, such as whether to buy a security, lend money, or rate a firm. Solve questions by matching the user's decision to the analysis goal.

Understand Role of Financial Statement Analysis

Financial reporting is what a company does: it prepares and presents financial statements, notes and related disclosures for outside users. Financial statement analysis is what you do with that output: you use it to make economic decisions. Reporting is the supply side. Analysis is the demand side.

The main goal of analysis is to assess a company's performance (profitability, cash flow generation) and its financial position (liquidity, solvency, asset quality), and then use that assessment to support a decision. The decision is the point. Numbers alone are not the goal.

Different analysts ask different questions. An equity analyst wants to value a share, so they focus on earnings, growth and risk to equity holders. A credit analyst wants to know whether the borrower can pay interest and principal on time, so they focus on cash flow, leverage, coverage and downside protection. Other users include portfolio managers, regulators, rating agencies, and people evaluating mergers or private companies.

Analysts do not stop at reported numbers. Reporting involves management choices and estimates, so analysts may adjust figures, compare companies, and look at the quality of the reported information. They also use sources beyond the statements, such as management commentary, industry data and the auditor's report.

On the exam, this topic is conceptual. You are asked who does what, why they do it, and which information suits which decision. Read the stem for the user and the decision, then choose the answer that fits.

How to solve Role of Financial Statement Analysis questions

Use this method for any conceptual question on the role of financial statement analysis.

  1. 1Identify the user in the stem: equity analyst, credit analyst, regulator, manager, or other.
  2. 2Identify the decision: value a share, lend money, rate a bond, evaluate a merger, or monitor performance.
  3. 3Decide whether the question is about reporting (preparing and presenting statements) or analysis (using them).
  4. 4Link the decision to the focus: equity decisions to earnings, growth and returns to owners; credit decisions to cash flow, leverage and ability to repay.
  5. 5Note whether the question is about past performance, current position, or forecasts.
  6. 6Eliminate options that confuse the roles, or that say analysis relies only on reported numbers with no adjustments or other sources.
  7. 7Pick the remaining option that matches the user and the decision.

Quickest way: User plus decision matching

When to use it: Use it when time is short and the question is a definition or role match.

  1. Underline the user and the decision in the stem.
  2. Reporting means preparing statements. Analysis means using them to decide.
  3. Equity: earnings and growth. Credit: cash flow and repayment ability.
  4. Cross out the two options that mismatch the user or reverse the roles.

Common mistakes in Role of Financial Statement Analysis

  • Treating financial reporting and financial statement analysis as the same thing.

    Both use the same statements, so the terms blur.

    Fix: Remember that reporting is preparing and presenting information, while analysis is using it to reach a decision.

  • Assuming analysis ends once ratios are calculated.

    Students focus on computing numbers.

    Fix: The goal is a decision or conclusion. Ratios are inputs to judgement about performance, position and forecasts.

  • Giving equity and credit analysts the same focus.

    Both read the same statements.

    Fix: Equity analysts focus on value and returns to owners. Credit analysts focus on ability to meet debt obligations.

  • Believing reported figures should always be accepted as they are.

    Audited statements seem final.

    Fix: Reporting involves choices and estimates, so analysts may adjust figures and assess reporting quality.

  • Thinking the financial statements are the only information source.

    The topic name emphasizes statements.

    Fix: Analysts also use management commentary, notes, the auditor's report, industry and economic information.

Worked examples

Example 1

A credit analyst at a bank is reviewing a corporate loan application. Which focus is most appropriate? A. Ability of the borrower to generate cash to service debt. B. Likely share price appreciation over the next year. C. Dividend growth for common shareholders.

Show the solution
  1. The user is a credit analyst and the decision is whether to lend.
  2. Lenders care about repayment of interest and principal.
  3. Option B is an equity valuation concern, and C concerns owners' returns.
  4. Option A matches the lending decision.

Answer: A

Example 2

Which statement best distinguishes financial statement analysis from financial reporting? A. Analysis is the preparation of statements, and reporting is their interpretation. B. Reporting presents financial information, and analysis uses it to evaluate performance and position for decisions. C. Both are the same process performed by management.

Show the solution
  1. Reporting is the preparation and presentation of financial information by the company.
  2. Analysis is performed by users to evaluate performance and financial position and to support decisions.
  3. Option A reverses the roles.
  4. Option C says they are identical, which is wrong.
  5. Option B states the roles correctly.

Answer: B

Exam tips

  • Read for the user and the decision first. That usually identifies the right answer.
  • Watch for reversed definitions of reporting and analysis. Examiners use this as a trap.
  • Remember that analysts often adjust reported numbers and use sources beyond the statements.
  • Questions are three-option, so eliminate any option that mismatches the user type, then compare the last two.
  • Expect this topic to be linked to the analysis framework and statement components, so study them together.

Practice questions from Introduction to Financial Statement Analysis

Role of Financial Statement Analysis in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Role of Financial Statement Analysis: frequently asked questions

What is the role of financial statement analysis?

It uses a company's financial reports to assess past performance and current financial position, and to forecast the future. The result supports decisions such as investing, lending or rating. It turns reported data into judgement.

What is the difference between financial reporting and financial statement analysis?

Financial reporting is the preparation and presentation of statements and disclosures by the company. Financial statement analysis is the use of that information by analysts and other users. One supplies information and the other applies it.

How do equity and credit analysts differ?

Equity analysts are mainly concerned with valuing the company's shares, so they look at earnings, growth and risk. Credit analysts are concerned with repayment, so they look at cash flow, leverage and coverage. Both start with the same statements.

Is this topic calculation-heavy on the exam?

No. It is mainly conceptual and tests roles, purposes and matching users to decisions. The calculation skills come in later topics on statements and ratios.