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CS Executive · Corporate Accounting and Financial Management · Financial Statement Analysis

Which of the following best describes the primary purpose of financial statement analysis for an external investor in a company?

The main purpose for an external investor is to assess the firm's profitability, solvency and future prospects from its published financial statements, so that a sound investment decision can be made. It is an interpretive exercise, not bookkeeping, auditing or setting depreciation rates.

  1. ATo evaluate the firm's profitability, solvency and prospects from published statements before taking an investment decisionCorrect
  2. BTo prepare the books of account of the company for the year
  3. CTo replace the statutory audit of the company's financial statements
  4. DTo determine the rate of depreciation permitted under the Companies Act

Explanation

Financial statement analysis interprets published statements to judge profitability, liquidity, solvency and future prospects, which helps investors decide. It does not create books of account, replace audit, or fix depreciation rates, so those options describe other activities.

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