Which type of group analysis is used to establish a benchmark when using financial ratios?

• A. Vertical analysis
• B. Horizontal analysis
• C. Industry group analysis
• D. Liquidity analysis

Answer: (C)

Verified step by step guidance

1. Understand the concept of financial ratios: Financial ratios are tools used to evaluate a company's financial performance and position by comparing various financial metrics.
2. Learn about the types of analysis: Vertical analysis compares financial statement items within a single period, horizontal analysis compares financial data across multiple periods, and liquidity analysis focuses on a company's ability to meet short-term obligations.
3. Recognize the purpose of industry group analysis: Industry group analysis involves comparing a company's financial ratios to those of other companies within the same industry to establish a benchmark and assess relative performance.
4. Identify why industry group analysis is the correct answer: Industry group analysis provides context for financial ratios by considering industry standards, which helps in benchmarking and evaluating a company's competitive position.
5. Apply this understanding: When using financial ratios, always consider the industry group analysis to ensure comparisons are meaningful and aligned with industry norms.