Question

Assertion (A): Financial Statement Analysis is undertaken by investors, lenders and creditors for assessing the safety of the amount invested in the company.

Reason (R): Investors, lenders and creditors undertake the financial statements analysis because they have invested their money in the company and have either indirect control or no control on the affairs of the company.

In the context of the above two statements, which option is correct?

Options

• Both Assertion (A) and Reason (R) are correct, but Reason (R) is not the correct explanation for Assertion (A).

• Both Assertion (A) and Reason (R) are correct, and Reason (R) is the correct explanation for Assertion (A).

• Assertion (A) is correct but Reason (R) is not correct.

• Both Assertion (A) and Reason (R) are not correct.

Answer 1

Both Assertion (A) and Reason (R) are correct, and Reason (R) is the correct explanation for Assertion (A).

Explanation:

Assertion (A) is correct because external stakeholders like investors and lenders analyse financial statements to verify the safety and profitability of their funds. Reason (R) is also correct and provides the exact logical explanation because these external groups do not participate in the daily management or operations of the company; therefore, analysing financial statements is their only tool to monitor the risk and safety of their investment.