Which of the following best describes the purpose of financial statement analysis?

The purpose of financial statement analysis is fundamentally about assessing the financial health of a business. This analysis enables stakeholders—such as management, investors, creditors, and analysts—to evaluate a company's performance and its ability to generate profits, manage costs, and sustain operations.

Through financial statement analysis, various ratios and metrics can be derived from the income statement, balance sheet, and cash flow statement, helping to give insights into liquidity, profitability, leverage, and efficiency. By understanding these elements, stakeholders can make informed decisions regarding investments, credit, and operational strategies.

In contrast, classifying and recording transactions primarily involves bookkeeping and the initial steps of financial data management, which is foundational but does not provide an overarching view of financial health. Developing advertising strategies is a marketing function that relates to promoting a business rather than analyzing its finances. Preparing tax returns involves compliance with tax laws and regulations rather than assessing the overall financial position of a business. Thus, the emphasis of financial statement analysis on evaluating financial health distinguishes it from these other functions.