What is the role of scenario analysis in an integrated financial model?

• A. Tests changes in assumptions to see effects on earnings, cash, and equity for valuation and risk assessment.
• B. Ensures that revenue recognition rules are always the same.
• C. Determines tax credits automatically.
• D. Eliminates the need for depreciation.

Answer: (A)

Scenario analysis in an integrated financial model is about testing how changes in key assumptions propagate through the model to affect earnings, cash flow, and equity value. By adjusting inputs like revenue growth, operating margins, capital expenditures, working capital needs, financing terms, and tax rates, you can see how the income statement, balance sheet, and cash flow statement interact under different conditions. This helps illuminate the sensitivity of the valuation and assess risk—identifying which variables drive outcomes and where cushions or adjustments might be needed. The other options describe policies or capabilities (like revenue recognition consistency, automatic tax credits, or depreciation elimination) that aren’t what scenario analysis primarily addresses.