Question

One ofthe important objectives of analysis of financial statements is to assess the ability ofthe enterprise to meet its short-term obligations as and when they become due.

Identify the objective of financial statement analysis highlighted in the above statement. Also explain two other objectives of financial analysis.

Answer 1

To assess Short-term Solvency or Liquidity Position of the enterprise.

Two Other Objectives of Financial Analysis:

1. To Assess Earning Capacity/Profitability: It helps analyse the net profit margin and overall earning trends of the business. This directly assists investors and owners in judging the safety and growth potential of their capital investment.
2. To Measure Management’s Operating Efficiency: It helps check how effectively and productively the corporate management is utilising the company’s assets and resources. This ensures proper cost control and helps in smoother business operations.