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

Which of the following is the main purpose of analysing a company's financial statements using ratios?

The main purpose of ratio analysis is to identify relationships and trends in the financial statements so users can assess performance and financial position. It does not substitute for an audit, check IFRS compliance, or compute tax, which are separate processes.

  1. ATo replace the need for the statements to be audited
  2. BTo identify relationships and trends that help users assess performance and financial positionCorrect
  3. CTo ensure the statements comply with IFRS Accounting Standards
  4. DTo calculate the tax payable for the period

Explanation

Ratio analysis turns raw figures into relationships and trends so users can judge performance, liquidity and gearing. It does not replace audit, test compliance with standards or compute tax. The distractor on compliance confuses analysis with the regulatory framework.

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