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Financial Statement Analysis Techniques

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Questions and Answers

What is the primary purpose of horizontal analysis in financial statement analysis?

To identify the most profitable investment opportunity

To identify trends and patterns over time within a single company (correct)

To determine the creditworthiness of a potential borrower

To compare financial data between two or more companies

What type of analysis is used to identify trends and patterns over time within a single company?

Ratio analysis

Benchmarking analysis

Horizontal analysis (correct)

Vertical analysis

If an investor is considering investing in one of two companies, what type of analysis would be most relevant?

Time-series analysis

Horizontal analysis

Cross-sectional analysis (correct)

Vertical analysis

What is the main difference between horizontal and vertical analysis?

Horizontal analysis focuses on changes over time, while vertical analysis focuses on proportions Signup and view all the answers

An investor is considering investing in a company and wants to evaluate its profitability over time. What type of analysis would be most relevant?

Horizontal analysis Signup and view all the answers

What is the primary purpose of vertical analysis in financial statement analysis?

To examine the proportion of each item to a base item Signup and view all the answers

What type of analysis is used to examine the proportion of each item to a base item?

Vertical analysis Signup and view all the answers

An investor is considering investing in a company and wants to evaluate its liquidity position. What type of analysis would be most relevant?

Ratio analysis Signup and view all the answers

What is the main advantage of using horizontal analysis in financial statement analysis?

It allows for the identification of trends and patterns over time Signup and view all the answers

What type of information would an investor need to find in order to perform horizontal analysis?

Multiple years' financial statements Signup and view all the answers