Michigan Residential Builders License Practice Test

What kind of analysis involves calculating various financial ratios?

1. Financial forecasting

2. Financial statement analysis

3. Market analysis

4. Budgeting analysis

The correct answer is: Financial statement analysis

The correct answer indicates that financial statement analysis involves calculating various financial ratios to assess the performance, profitability, liquidity, and solvency of an organization. This type of analysis typically requires examining the balance sheet, income statement, and cash flow statement to derive ratios such as the current ratio, quick ratio, return on equity, and debt-to-equity ratio, among others. These ratios provide valuable insights into how well a company is managing its resources and obligations, helping stakeholders make informed decisions. Financial forecasting, while closely related, focuses on predicting future financial outcomes based on historical data and forecasts rather than analyzing existing ratios. Market analysis is concerned with understanding market conditions and competition, focusing on external factors rather than internal financial metrics. Budgeting analysis involves reviewing and managing a company's budget but does not specifically focus on calculating financial ratios. Hence, financial statement analysis is the most accurate term that encompasses the process of calculating and interpreting various financial ratios.