Financial Statement Analysis — Free Practice Questions

Why: The financial statement analysis framework begins with articulating the purpose and context of the analysis: identifying the questions the analysis must answer, the audience, and the form and timing of the end product. Only after the objective is defined can the analyst determine what data are relevant. Collecting input data is the second step of the framework and depends on the defined purpose, since the purpose determines which information is needed. Processing data into adjusted statements, common-size statements, and ratios is the third step and presupposes that data have already been gathered.

Why: In the framework's data-processing step, the analyst transforms raw inputs into an analytically comparable form — making adjustments for differing accounting choices, preparing common-size statements, and computing ratios all belong to this step. Collecting input data refers to gathering the financial reports, industry information, and other raw material before any transformation occurs. Developing and communicating conclusions is a later step in which the analyst prepares the report and recommendation that answer the questions established at the outset; it uses the processed data rather than creating it.