Final answer:
The first step in an analysis of financial statements is to specify the objectives of the analysis. This step dictates what information is sought and the focus areas, and it precedes other tasks such as a common-size analysis or checking the auditor's report. It's essential for maintaining an objective stance and aligning further investigation with the goals of the analysis.
Step-by-step explanation:
The first step in an analysis of financial statements is to specify the objectives of the analysis. This foundational step is crucial as it guides the entire analysis process by outlining what you aim to discover or determine from the financial statements. The objectives could range from assessing the company's financial health to making investment decisions. One must think carefully about the timeline of events, understanding what happens first, what happens next, and identifying cause and effect to keep the analysis correct.
Once the objectives are clear, you may proceed with other steps in the analysis, such as conducting a common-size analysis, checking the auditor's report, and reviewing other references containing financial information. However, the preparatory step of stating your aims and what you hope to achieve with the financial analysis is paramount.
This step ensures an objective stance, maintaining a focus on fact-based reporting, and helps in the alignment of subsequent analyses like evaluating risk in financial assets or considering important factors to investors in the financial market.