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Question : Types of financial statement analysis are:

Option 1: External analysis

Option 2: Internal analysis

Option 3: Horizontal and vertical analysis

Option 4: All of the above


Team Careers360 5th Jan, 2024
Answer (1)
Team Careers360 11th Jan, 2024

Correct Answer: All of the above


Solution : Some of the main types of financial analysis include:

1. Internal Analysis: Internal analysis involves assessing a company's financial performance and position using its own financial statements and internal data. It helps identify strengths, weaknesses, opportunities, and threats (SWOT) within the organization and guides strategic decision-making. Internal analysis techniques include ratio analysis, trend analysis, and variance analysis.

2. External Analysis: External analysis involves evaluating a company's financial performance and position relative to its industry peers, competitors, and the overall market environment. It helps benchmark the company's performance, identify industry trends, and assess market opportunities and threats. External analysis techniques include industry analysis, competitor analysis, and market research.

3. Horizontal Analysis: Horizontal analysis, also known as trend analysis, involves comparing financial data over multiple periods to identify trends, patterns, and changes over time. It helps assess the direction and magnitude of changes in key financial metrics such as revenue, expenses, and profits. Horizontal analysis is typically conducted using financial statements such as income statements, balance sheets, and cash flow statements.

4. Vertical Analysis: Vertical analysis, also known as common-size analysis, involves expressing each line item on a financial statement as a percentage of a base amount (usually total revenue or total assets). It helps assess the relative proportion of each component within a financial statement and identify trends or anomalies. Vertical analysis facilitates comparisons across companies of different sizes and industries.

5. Ratio Analysis: Ratio analysis involves calculating and interpreting various financial ratios that provide insights into different aspects of a company's financial performance, liquidity, solvency, efficiency, and profitability. Common financial ratios include liquidity ratios (e.g., current ratio, quick ratio), solvency ratios (e.g., debt-to-equity ratio, interest coverage ratio), profitability ratios (e.g., return on equity, gross profit margin), and efficiency ratios (e.g., inventory turnover, accounts receivable turnover).

Hence, the correct option is 4.

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