Updated for the 2026-2027 CFA® Level I curriculum.
Financial statement analysis helps users interpret reported performance, financial position, and cash flows to support a decision. An investor, lender, and manager can examine the same reporting package while asking different questions. For CFA Level I, connect each user's role with the conclusion that user needs.
Quick Answer
The purpose of financial statement analysis is to evaluate a company's past and current performance, financial position, and cash flows to support economic decisions. External users such as equity investors and creditors use it to judge risk and return. Internal users such as management use it to monitor operations and plan strategy. The role shifts with the decision, but the underlying statements stay the same.
Key Takeaways
Financial statement analysis supports decision-making, not just reporting. Users convert raw statement data into judgments about value, risk, or performance.
External investors commonly rely on published statements. Lenders, regulators, and auditors can also have access to additional information through agreements, supervision, or an audit engagement.
Internal users, mainly management, use the same statements plus internal data to monitor operations and plan ahead.
Different users apply the same financial statements to different questions. A creditor asks about repayment ability. An equity investor asks about future earnings growth.
Financial statement analysis is a distinct activity from financial reporting. Reporting produces the statements. Analysis interprets them.
What You Need to Know for CFA Level I
The LOS verb is "describe." You are not asked to calculate ratios here, only to explain who uses financial statement analysis and why.
The core concept is that financial statement analysis converts reported data into decision-useful conclusions for a specific user and a specific question.
Know the main external user groups (equity investors, creditors, regulators, auditors) and the main internal user (management), along with the question each one typically asks.
Keep this note separate from the Financial Statement Analysis Framework note. This page covers the "why" and "who." The framework note covers the "how," meaning the six-step analysis process.
The common trap is treating financial statement analysis as identical to financial reporting. Reporting is the output. Analysis is what users do with that output.
What Is Financial Statement Analysis For?
Financial statement analysis exists because raw financial statements do not answer questions on their own. A balance sheet shows assets and liabilities at a point in time. It does not tell you whether the company can service its debt next year. Financial statement analysis is the process of using that data, along with other information, to answer a specific economic question.
The Core Role: Supporting Economic Decisions
At Level I, the role of financial statement analysis comes down to one idea: it helps users decide whether to commit resources to a company, extend credit to it, regulate it, or manage it more effectively. Every user group listed in the curriculum maps back to this core role. The decision determines which measures, time horizon, and risks deserve the most attention.
Who Uses Financial Statement Analysis?
The curriculum splits users into two broad groups: external users and internal users. The split matters because it explains why the same income statement supports completely different conclusions depending on who is reading it.
External Users
External users operate outside company management. Public investors commonly depend on published financial statements, notes, and disclosures, while lenders may receive private information under credit agreements. Auditors and regulators can have inspection rights or other access to internal records.
Equity investors and analysts
They assess whether a stock is fairly valued, overvalued, or undervalued based on earnings quality, growth, and risk.
Creditors and rating agencies
They assess whether a borrower can meet interest and principal payments, focusing heavily on cash flow and leverage.
Regulators
They monitor compliance with reporting standards, solvency requirements, or industry-specific rules.
Auditors
They evaluate whether statements fairly present the company's financial position under the applicable framework.
Customers and suppliers
They assess the financial stability of a counterparty before entering a long-term contract.
Internal Users
Internal users have access to both the published statements and additional internal data such as budgets, forecasts, and operational metrics.
Management
Management uses financial statement analysis to monitor performance against budget, evaluate divisions, and support strategic decisions such as capital allocation or cost control.
User type | Example user | Primary question asked |
|---|---|---|
External | Equity analyst | Is the stock worth buying at the current price? |
External | Credit analyst | Can this company repay its debt on time? |
External | Regulator | Does the company comply with reporting and capital rules? |
External | Auditor | Do the statements fairly represent financial position? |
Internal | Management | Are operations meeting internal targets and plans? |
This table is the kind of detail Level I rewards. You are not expected to calculate anything here, but you should be able to match a user type to the question that user is most likely asking.
Working Example
Scenario. Castleview Manufacturing reports net income of $8 million for the year, up from $6 million last year. Two separate users review the same income statement.
Analyst One works for a bank that is deciding whether to renew a $40 million revolving credit line to Castleview. Analyst Two works for an equity fund deciding whether to buy Castleview shares.
Step 1: Identify what each user needs from the statement.
Analyst One (creditor) needs evidence that Castleview generates enough stable cash flow to cover interest and principal payments on the credit line.
Analyst Two (equity investor) needs evidence that rising net income reflects sustainable growth that will increase future earnings and stock value.
Step 2: Apply the same data differently.
Analyst One checks the cash flow statement and notes that operating cash flow grew more slowly than net income, which raises a flag about earnings quality and repayment capacity.
Analyst Two checks the revenue breakdown and notes that the income increase came from a new product line, which supports a higher growth estimate.
The same $8 million net income number leads to two different conclusions. The creditor focuses on repayment risk and cash flow reliability. The equity investor focuses on growth potential and future earnings. Neither user is "more correct." Each is applying financial statement analysis to the question relevant to their own decision.
Common Exam Traps
Confusing financial reporting with financial statement analysis
Financial reporting is the preparation and presentation of the statements. Financial statement analysis is what users do with that output. The Level I exam may test this distinction directly.
Assuming all external users ask the same question
A creditor and an equity investor both rely on published statements, but they weigh cash flow, leverage, and growth differently. Treating all external users as interchangeable is a common error.
Overlooking management as a user
Candidates often associate financial statement analysis only with outside investors. Management is the primary internal user and relies on the same statements plus internal data for planning and control.
Mixing this note's scope with the analysis framework
This note covers who uses financial statement analysis and why. It does not cover the six-step analysis process, which belongs to the Financial Statement Analysis Framework note. Keep the two separate when answering exam questions.
Practice Question
A regional bank is reviewing a manufacturing company's financial statements before deciding whether to extend a three-year term loan. Which of the following best describes the primary role of financial statement analysis in this situation?
To prepare the company's financial statements in accordance with applicable accounting standards
To evaluate the company's ability to generate sufficient cash flow to meet future debt obligations
To determine the company's compliance with securities registration requirements
Correct Answer: B
The bank is an external user making a credit decision. Financial statement analysis in this context evaluates the company's capacity to generate cash flow and meet scheduled debt payments. This is the core role of financial statement analysis for a creditor.
Option A: This describes financial reporting, which is the preparation of the statements, not the analysis of them.
Option C: This describes a regulatory compliance function, not the bank's role as a creditor evaluating a loan.
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FAQs About Roles of Financial Statement Analysis
Who are the users of financial statements at Level I?
The main groups are equity investors, creditors, regulators, auditors, and company management. Each group uses financial statement analysis to answer a different decision-specific question.
What is the difference between internal and external users of financial statements?
External users operate outside management. Public investors generally rely on public disclosures, but lenders, auditors, and regulators may also obtain internal information through contractual or statutory access. Internal users, mainly management, have access to the same statements plus internal budgets, forecasts, and operational data.
Is financial statement analysis the same as financial reporting?
No. Financial reporting is the process of preparing and presenting the statements. Financial statement analysis is the process of interpreting those statements to support a decision.
Does the Level I exam require ratio calculations for this topic?
Not for this specific LOS. This note covers the purpose and users of financial statement analysis. Ratio calculations and analytical techniques are covered in later readings and notes.
Why do different users reach different conclusions from the same financial statements?
Each user applies the statements to a different question. A creditor focuses on repayment ability, while an equity investor focuses on growth and valuation. Some information is shared, while access to additional data may differ. The relevant measures and interpretation depend on the decision.