Question

_____ is not a tool of 'Analysis of Financial Statements'.

• A. Income Statement
• B. Ratio Analysis
• C. Comparative Statements
• D. Cash Flow Statement

Hint:

Financial statements (Balance Sheet, Income Statement, Cash Flow Statement, Statement of Changes in Equity, Notes) provide the raw data. Tools of analysis (Comparative Statements, Common-Size Statements, Ratio Analysis, Cash Flow Analysis, Trend Analysis) are techniques used to interpret this data.

Answer 1

The Correct Option is A

Step 1: Understand 'Analysis of Financial Statements':
Analysis of Financial Statements refers to the process of evaluating a company's financial health, performance, and prospects using various techniques applied to its financial data (like Balance Sheet, Income Statement).
Step 2: Identify Tools of Financial Statement Analysis:
Common tools include:
- Comparative Statements: Comparing financial statement data across two or more periods (e.g., Comparative Balance Sheet, Comparative Income Statement).
- Common-Size Statements: Expressing financial statement items as percentages of a common base (e.g., Total Assets/Liabilities for Balance Sheet, Revenue from Operations for Income Statement).
- Ratio Analysis: Calculating various ratios (Liquidity, Solvency, Activity, Profitability) to assess different aspects of performance and financial position.
- Cash Flow Statement Analysis: Analyzing the inflows and outflows of cash from operating, investing, and financing activities.
Step 3: Evaluate the Options:
(A) Income Statement: This is one of the primary *financial statements* itself, providing data (revenue, expenses, profit). It is the *subject* of analysis, not the tool used for analysis.
(B) Ratio Analysis: This is a key *tool* used to analyze relationships within financial statements.
(C) Comparative Statements: This is a specific *technique/tool* used for analysis over time.
(D) Cash Flow Statement: While a primary financial statement, its *analysis* (examining trends and sources/uses of cash) is a tool of financial analysis. The statement itself provides data, but its examination is analysis. However, compared to (A), Ratio Analysis and Comparative Statements are definitely tools. Cash Flow Statement analysis is also a tool. The Income Statement is fundamentally data, not a tool.
Conclusion:
The Income Statement is a financial statement providing data for analysis, not a tool *of* analysis itself. Ratio Analysis, Comparative Statements, and Cash Flow Statement Analysis are tools used to interpret financial statements.