Question

The tool of ‘Analysis of Financial Statements’ which helps to assess the profitability, solvency, and efficiency of an enterprise is known as:

• A. Cash flow statement
• B. Comparative statement
• C. Common size statement
• D. Ratio analysis

Hint:

Ratio analysis helps compare financial data over time and against industry benchmarks, offering a comprehensive understanding of business performance.

Answer 1

The Correct Option is D

Ratio analysis is a financial tool used to assess various aspects of an enterprise's performance, including profitability, solvency, liquidity, and operational efficiency. It involves the calculation of key financial ratios, such as: \[ \text{Profitability Ratios (e.g., Gross Profit Ratio, Net Profit Ratio)} \] \[ \text{Solvency Ratios (e.g., Debt-Equity Ratio, Interest Coverage Ratio)} \] \[ \text{Efficiency Ratios (e.g., Inventory Turnover Ratio, Debtors Turnover Ratio)}. \] These ratios provide detailed insights into the financial health of a business, aiding in informed decision-making. Conclusion:
The tool used to assess profitability, solvency, and efficiency is \( Ratio Analysis \).