Question

A creditor's objective in performing an analysis of financial statements differs from the objective of an investor. Explain the differences between the objectives.

Answer 1

Solution:

A Creditor's objective in performing an analysis of financial statment is to decide whether the company has the ability to repay interest and principal on borrowed funds. For this purpose he analyse, current ratio, quick ratio, debt equity ratio, debt to assets ratio, cash position etc from financial statements.

An investor's objective in performing analysis of financial statement is to determine whether an investment is warranted by estimating a company's future earnings stream. For this purpose, investor analyse financial statments from the prespective of profitability. He analyse, Gross profit ratio, net profit ratio, earning per share, dividend per share price earning ratio etc.