What is the purpose of financial statement analysis?

What is the purpose of financial statement analysis?

• A. To prepare tax returns for businesses
• B. To evaluate a company's financial statements for decision-making
• C. To determine stock market trends
• D. To assess employee performance

Answer: (B)

The purpose of financial statement analysis is to evaluate a company's financial statements for decision-making. This process involves reviewing key financial metrics and ratios derived from the company's income statement, balance sheet, and cash flow statement. By analyzing these documents, stakeholders such as investors, creditors, and management can gain insights into the company’s profitability, liquidity, operational efficiency, and overall financial health. This information is crucial for making informed decisions regarding investments, lending, and strategic planning. In contrast, preparing tax returns for businesses revolves around compliance with tax laws rather than analyzing financial performance for strategic decision-making. Determining stock market trends involves broader market analysis and is not specific to the individual company's financial statements. Lastly, assessing employee performance relates to human resources metrics instead of the financial health of the organization, making it unrelated to the objective of financial statement analysis.

The purpose of financial statement analysis is to evaluate a company's financial statements for decision-making. This process involves reviewing key financial metrics and ratios derived from the company's income statement, balance sheet, and cash flow statement. By analyzing these documents, stakeholders such as investors, creditors, and management can gain insights into the company’s profitability, liquidity, operational efficiency, and overall financial health. This information is crucial for making informed decisions regarding investments, lending, and strategic planning.

In contrast, preparing tax returns for businesses revolves around compliance with tax laws rather than analyzing financial performance for strategic decision-making. Determining stock market trends involves broader market analysis and is not specific to the individual company's financial statements. Lastly, assessing employee performance relates to human resources metrics instead of the financial health of the organization, making it unrelated to the objective of financial statement analysis.