Which type of accounting primarily uses financial ratios to analyze a company's performance for external stakeholders?

• A. Managerial accounting
• B. Tax accounting
• C. Cost accounting
• D. Financial accounting

Answer: (D)

Verified step by step guidance

1. Understand the purpose of financial accounting: Financial accounting is primarily concerned with providing financial information to external stakeholders, such as investors, creditors, and regulatory agencies. It focuses on preparing financial statements and analyzing a company's performance using financial ratios.
2. Review the role of financial ratios: Financial ratios are tools used in financial accounting to evaluate a company's financial health, profitability, liquidity, and efficiency. These ratios are derived from the financial statements, such as the balance sheet, income statement, and cash flow statement.
3. Differentiate between the types of accounting: Managerial accounting focuses on internal decision-making and operational planning, tax accounting deals with compliance and tax-related matters, and cost accounting is concerned with analyzing costs for internal purposes. Financial accounting, on the other hand, is designed for external reporting and analysis.
4. Recognize the stakeholders: External stakeholders, such as shareholders, creditors, and regulatory bodies, rely on financial accounting to make informed decisions about the company. Financial ratios are a key component of this analysis.
5. Conclude why financial accounting is the correct answer: Since financial accounting is specifically designed to provide information to external stakeholders and uses financial ratios for performance analysis, it is the correct answer to the question.