How to Read a Financial Report

Financial reports help creditors, auditors, and potential investors understand the overall condition of the company in the given year and the future goals it intends to pursue. Moreover, they basically highlight the overall health of a company by taking into account all income generation streams. For most businesses, the three main financial reports are Balance Sheet, Income Statement and the Statement of Cash Flow.

Instructions

  • 1

    Balance Sheet

    Balance Sheet summarizes all the assets and liabilities at a company’s disposal in a given accounting period. The former refers to the resources owned by the company, used in the production process and are subject to sale and consumption. They will largely comprise of ones with physical presence such as cash, land, equipment etc and intangible assets such as patents etc. Liabilities will be the obligations a company needs to fulfil, and will include taxes, loan payments, accounts payable.

    The difference will help determine the equity a company has for business. It will further help analyze shareholders’ position, and the owners’ intention to expand the business. Whether they pay the money as dividends or decide to retain the earnings which will be re-invested in the business for improvement.

  • 2

    Income Statement

    The income statement will tell us the money or revenue a company has made during an accounting period. It will provide detailed information on the company’s expenses and costs which have been used to generate that revenue.

    The top line will incorporate the total sales generated by the company. This will be subtracted from the cost of goods sold, along with all other expenses such as advertising, debt expenses, salaries, rent, taxes, and any dividends paid out. The resulting amount will be the total profit made by the company in the year. Comparing income statements helps assess the success of the company.

  • 3

    Cash Flow Statement

    The Cash Flow Statement gauges the cash a company has to pay its expenses in a given time period, not at the end of the accounting cycle. The three basic elements which make up the cash flow statement include Operating activities, Investing activities and Financing Activities. This will detail how the company made profit by selling its products or services, selling some of its assets or investment or how the cash was injected back for future development.

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