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ACCA Applied Knowledge · Financial Accounting · Importance and purpose of analysis of financial statements

A potential investor wants to judge whether management has made efficient use of the resources entrusted to it. Which of the following needs of users is the investor addressing?

The investor is assessing stewardship, meaning how well management has used and protected the resources entrusted to it. Financial statements help investors judge this through reported profit, financial position and cash flows, which influences decisions to buy, hold or sell their investment.

  1. AAssessing stewardship and management performanceCorrect
  2. BAssessing the entity's compliance with tax law
  3. CDetermining the entity's sales price policy
  4. DMeasuring the entity's environmental impact only

Explanation

Judging how well management has used the resources entrusted to it is the assessment of stewardship. It is a key purpose of financial statements for investors. Tax compliance and pricing policy are not what the investor is assessing, and environmental impact is not the focus.

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