Certified Financial Management Specialist Practice Exam

Which type of analysis involves comparing financial statement items to each other?

1. Benchmarking

2. Trend analysis

3. Ratio analysis

4. Variance analysis

The correct answer is: Ratio analysis

Ratio analysis is a method that involves evaluating the relationships between various financial statement items to gain insights into a company's performance, financial health, and operational efficiency. By using ratios, such as the current ratio, debt-to-equity ratio, and return on equity, analysts are able to draw comparisons that can illuminate strengths and weaknesses in a company's financial structure. This analytical approach helps in understanding how different elements of the financial statements relate to one another, allowing for an assessment of liquidity, profitability, and solvency. For example, comparing net income to total revenue provides insights on profitability, while examining current assets against current liabilities helps assess liquidity. Other types of analysis serve different purposes. Benchmarking typically involves comparing a company's performance metrics against industry standards or competitors, rather than focusing solely on the internal relationships between financial statement items. Trend analysis looks at the changes in financial metrics over time to identify patterns or movements, while variance analysis centers on the differences between planned financial outcomes and actual results, which also does not focus on the relationships between financial statement items. Therefore, ratio analysis is the most fitting choice when discussing comparisons between financial statement items directly.