Understand Common Financial Reports
Do you receive financial reports from companies whose shares you own and cannot understand what the report says? Are you a business owner who is good at business operations but knows nothing about accounting? If yes, you need to learn to understand common financial reports.
Financial reports may comprise of hundred pages but actually there are only three pillars on which accountants build a huge edifice; the balance sheet, income and expenditure account and cash flow statement. If you understand the basics of these common financial reports you have solved the puzzle.
The Balance Sheet
A balance sheet is prepared as of a particular date and reflects what the company owns and owes; a statement of assets and liabilities. Commonly, the assets are tangible assets and include fixed assets (land and building, cars, computers etc), investments and current assets (cash, bank balances, advances, inventory, machinery, equipments and receivables). Some companies feel the need of showing the value of intangible assets in the balance sheet. These include the value of the company's brands, goodwill and patents.
The amount of owner's capital as well as shareholder's funds is a liability that the company owes and so are loans and payables such as supplier's credit, loans, unpaid taxes, etc.
Income and Expenditure Statement
Commonly referred to as income statement, this report is prepared for a specific period, monthly, quarterly or yearly. For business accounts this is sometimes called the Trading and Profit and Loss Account.
The income statement enumerates the revenue generated over the period and how it was spent. This is basically a reflection of a company's operations; amounts spent for making its products, total turnover and marketing and establishment expenses. The net figure reflects profit or loss. Total profit divided by the total number of shares is reflected as earnings per share.
Cash Flow Statement
The cash flow statement of a company shows how the business managed cash. Even if the company has made a significant profit, it could still be living off borrowed money. Cash flow statement reflects whether the company generated adequate cash for payroll, expenses and supplier payments.
If you understand the common financial reports, the rest is easy. The rest of the report comprises of statutory statements, tables and footnotes to explain in detail each item in these three reports. For example, there will be a tabular listing of fixed assets and depreciation of each asset. Similarly, you need to read the footnotes to know the company's tax liability and other matters affecting the future prospects of the company.
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