You can find all answers to the questions about the financial statement guide, which we have discussed in detail especially for beginners, in our today's blog post.

Table of Contents

The Basics

Cash Flow Statements

Important Notes

Final Thoughts

 

The Basics

If you can read a food label or something like that, you can also learn to read basic financial statements. If you can follow a recipe or apply for a loan, you can learn basic accounting. The basics are actually not as difficult as they seem and should not be visualized like rocket science. In this article, we will help you gain a basic understanding of how to read financial statements. This way you will understand how to read the basic parts of a financial statement. We will not train you to become an accountant, but we will give you the opportunity to look at and make sense of a range of financial statements. Let's start by looking at what financial statements do.

 

We all remember Cuba Gooding Jr.'s immortal line from the movie Jerry Maguire, “Show me the money!” That's exactly what financial statements do. They show you the money. They show you where a company's money comes from, where it goes, and where it is now. There are four main financial statements. These are balance sheets, income statements, cash flow statements; and equity statements. Balance sheets show what a company owns and what it owes at a given time. Income statements show how much money a company has made and spent over a period of time. Cash flow statements also show the exchange of money between a company and the outside world over a period of time. The fourth financial statement, called the “statement of equity,” shows changes in the interests of the company's shareholders over time.  Let's look at this internal financial statement in more detail. 

 

1-) Balance Sheets

 

The balance sheet provides detailed information about a company's assets, liabilities, and equity. Assets are things a company owns and have value. It generally means that they can be sold or used to make products or provide services that can be sold by the company. Assets include physical properties such as facilities, trucks, equipment, and inventory. It also includes things that are intangible but still exist and have value, such as trademarks and patents. Liabilities are amounts of money a company owes to others. This can include any liabilities such as money borrowed from a bank to launch a new product, rent for the use of a building, money owed to suppliers for materials, payroll owed by a company to its employees, environmental clean-up costs, or taxes owed. government. Obligations also include obligations to provide goods or services to customers in the future.

2-)Income statement

 

An income statement is a report that shows how much revenue a company has generated in a given time period. This time frame usually corresponds to 1 year. The income statement also shows the costs and expenses associated with generating that income. The "bottom line" of the statement usually shows the company's net gains or losses. This shows how much the company gained or lost during the period.

 

Income statements also report earnings per share. This calculation shows how much money shareholders would receive if the company decided to distribute all net earnings for the period. Companies almost never distribute all of their earnings. They often reinvest them in business.

 

To understand how income statements are created, think of them as a series of stairs. You start from the top with the total amount of sales made during the accounting period. Then you go down, it goes one step at a time. At each step, you take a deduction for certain costs or other business expenses related to generating revenue. At the end of the stairs, after all expenses are deducted, you find out how much the company actually gained or lost during the accounting period. Often this is called the "result".

 

Cash Flow Statements

 

Cash flow statements report a company's cash inflows and outflows. This is very important because a company must have sufficient cash on hand to pay for its expenses and purchase assets. While an income statement can tell if a company is making a profit, a cash flow statement can tell if the company is generating cash. The cash flow statement shows changes over time rather than absolute dollar amounts at a given time. It uses and rearranges information on a company's balance sheet and income statement.

 

The bottom line of the cash flow statement shows the net increase or decrease in cash for the period. In general, cash flow statements are divided into three main sections. Each section reviews cash flow from one of three types of activities: operating activities; investment activities; and financing activities.

 

Important Notes

 

• Significant accounting policies and practices – Companies need to disclose accounting policies that are most significant to show the company's financial position and results. Those often require management's most difficult, subjective or complex judgments.

 

• Income taxes – The footnotes support detailed information about the company's current and deferred income taxes. The information is broken down by levels – federal, state, local, and/or foreign, and the key items that affect the company's effective tax rate are disclosed.

 

• Retirement plans and other retirement programs – The footnotes discuss the company's retirement plans and other retirement or post-employment benefit programs. The notes consist of specific information about the assets and costs of these programs and show whether the plans are over-or under-funded.

 

• Stock options – The notes also consist of information about stock options granted to officers and employees, including the method for accounting for share-based compensation and the effect of the method on reported results.

 

Final Thoughts 

Although each financial statement is handled separately in our article today, keep in mind that they are all related to each other. Changes in the assets and liabilities you see on the balance sheet are also reflected in the income and expenses you see on the income statement, resulting in the company's gains or losses. Cash flows provide more information about cash assets listed on a balance sheet and are related, but not equivalent, to net income shown on the income statement. And such that. No financial statement tells the whole story. But together, they provide very powerful information for investors. 

 

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