ACCA Applied Knowledge · Financial Accounting · Importance and purpose of analysis of financial statements
Which of the following best describes the main purpose of analysing a company's financial statements using ratios?
The main purpose of ratio analysis is to identify trends and relationships in financial statement figures so users can assess performance and financial position. It is an interpretation tool, not a check on bookkeeping completeness, a substitute for audit, or a tax calculation.
- ATo verify that every transaction has been recorded in the ledgers
- BTo identify trends and relationships that help users assess performance and financial positionCorrect
- CTo replace the need for an external audit
- DTo calculate the tax payable for the period
Explanation
Ratio analysis turns raw figures into relationships and trends that help users judge performance, liquidity and financial position. It does not check the completeness of recording (that is a control or audit matter), does not replace an audit, and is not a tax computation.
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