Certified Valuation Analyst (CVA) Practice Exam

Which of the following is not considered a step in financial statement analysis?

1. Analysis of cash flows

2. Discount for lack of marketability

3. Ratio analysis

4. Comparative analysis

The correct answer is: Discount for lack of marketability

The process of financial statement analysis involves several key steps aimed at evaluating a company's financial health and performance. Analysis of cash flows, ratio analysis, and comparative analysis each play crucial roles in understanding how well a company is doing from a financial standpoint. The analysis of cash flows focuses on understanding the inflows and outflows of cash within a business, which is vital for assessing liquidity and the ability to meet obligations. Ratio analysis allows for the examination of various financial metrics, enabling comparisons across time periods or against industry benchmarks. Comparative analysis involves evaluating financial statements against those of peers or industry standards, providing context to the firm's performance. In contrast, while the discount for lack of marketability is an important concept in valuation—typically used to adjust the value of a non-publicly traded company for the lack of liquidity—it does not directly fit within the steps of financial statement analysis itself. It is more relevant in the context of determining value rather than performing a comprehensive assessment of financial performance through the analysis of financial statements. This specificity helps clarify why this choice is not considered a formal step in financial statement analysis.