Which of the following is least likely to be considered a role of financial statement analysis? A) Determining whether to invest in the company’s securities. B) Deciding whether to extend trade credit to the company. C) To make economic decisions. D) Assessing the management skill of the company’s executives. I think an argument can be made for each of these.
A, D) Is absolutely true. A- Calcualte P/E’s, P/BV, P/CF’s etc. D, Look at how mgmt is performing (ROA, ROE, etc) B) Look at ratios to see if the company is solvent and can pay off additional debts. I don’t understand C, so I say C.
D
What if a whole new executive team comes in a month before financial statements are released? The financial statements would say nothing about their management skills.
I said C, answer is D: Your answer: C was incorrect. The correct answer was D) Assessing the management skill of the company’s executives. The role of financial statement analysis is to use the information in a company’s financial statements, along with other relevant information, to make economic decisions. Examples of such decisions include whether to invest in the company’s securities or recommend them to other investors, or whether to extend trade or bank credit to the company. Although the financial statements might provide indirect evidence about the management skill of the company’s executives, that is not generally considered the role of financial statement analysis.