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:

For analyzing financial statements, ratio analysis provides a comprehensive view of profitability, solvency, and efficiency, enabling effective decision-making for stakeholders.

Answer 1

The Correct Option is D

Ratio analysis is a widely used tool of financial statement analysis that helps assess the profitability, solvency, and efficiency of an enterprise. It involves calculating various financial ratios such as: Profitability Ratios: Assess the ability to generate profits. Solvency Ratios: Evaluate the financial stability and long-term solvency. Efficiency Ratios: Measure how effectively resources are utilized. The other tools listed have their specific purposes: Cash flow statement: Tracks cash inflows and outflows. Comparative statement: Compares financial data over different periods. Common size statement: Expresses financial data as percentages for comparison. However, these tools do not comprehensively assess profitability, solvency, and efficiency, making ratio analysis the most appropriate answer.