Financial statement analysis consists of 3 steps outlined in

Financial statement analysis consists of 3 steps outlined in your chapter. Match the step with the best explanation.

Accounting analysis

Financial analysis

Prospective analysis

Evaluation of the extent to which a company\'s financial statements reflect economic realty

Involves the use of adjusted financial information to conduct cash flow analysis, profitability analysis, and risk analysis

Involves combining the results of the other two, along with an analysis of the business environment and company strategy, to forecast future financial statement information, especially cash flows and income

Solution

SOLUTION:

Accounting analysis: Evaluation of the extent to which a company\'s financial statements reflect economic realty

Financial analysis: Involves the use of adjusted financial information to conduct cash flow analysis, profitability analysis, and risk analysis

Prospective analysis: Involves combining the results of the other two, along with an analysis of the business environment and company strategy, to forecast future financial statement information, especially cash flows and income

Explanation:

1) Accounting analysis involves the evaluation of the extent to which a financial statement of a company indicates economic reality. There are three common distortions in financial statements are:

-- Accounting standards are inconsistent with economic reality

-- Error Estimation by management in applying accounting standards

-- Intentional manipulation of financial statements by management

2) Financial analysis involves the use of adjusted financial statement information for conducting:

-- Cash flow analysis: how a company generates and uses cash

-- Profitability analysis: primarily focus is on return on capital invested

-- Risk analysis: evaluation of liquidity and solvency for the assessment of the ability of a company to meet its obligations

3) Prospective analysis combines the results of accounting analysis and financial analysis. Additionally analyze company strategy and the business environment for forecasting future financial statement information