While a bulky printed financial statement might look daunting, it is not as dense as it looks, and is really not that difficult to read and understand once you learn the terminology. Sure, being able to read a financial statement takes a little basic finance knowledge and understanding of basic accounting principles, but it is really not that complex.
Reading and Understanding a Company Financial Statement
The basic information involved is expenses vs. earnings - that is, did the company report a profit or a loss during the reporting period. But there are a myriad of factors that go into calculating net profits or losses, and the financial statement of a company provides a detailed look at what went into calculating the bottom line.
A financial statement is typically divided into four sections – the balance sheet, the income statement, the cash flow statement, and the statement of shareholders' equity.
Balance Sheet Analysis
The balance sheet of a financial statement offers a wealth of detailed information about a company's assets and liabilities, as well as data regarding the current shareholder's equity (or the current net worth of the business). Assets are defined as the shareholder's equity after subtracting the liabilities. It is called a balance sheet because the shareholder's equity minus liabilities must "balance" (that is, equal) the assets.
Income Statement
The income report specifies how much revenue a company earned over the reporting period. The gross income is divided into detailed categories, including all outlays required to bring in that revenue, and an income statement offers a "bottom line" reporting the net earnings or losses. The top line of an income statement is referred to as gross revenues, and the different amounts subtracted from the gross income such as returns, expenses, marketing allowances, and the like are all shown as line items working down to the bottom line reflecting net earnings.
Earnings per share (EPS) is also a category on most income statements, and reflects how much money the company earned per share. EPS is a key indicator that can be gleaned from financial statement analysis and is generally considered the gold standard for evaluating corporate performance.
Cash Flow Statement
The cash flow statement provides the required data on all inflows and outflows of cash to the business. The cash flow statement basically reorders the information from a company’s balance sheet and income statement, but a cash flow report illustrates changes over time instead of reflecting absolute dollar amounts at a specific point in time. The bottom line of the statement shows the net increase or decrease in cash during that specific period.
Statement of Shareholders' Equity
The statement of shareholder's equity shows the changes in the shareholders of the company over time (that is, new shareholders), and makes it possible to determine who the current major shareholders of a company are as well as determine if any individual/legal entity has recently sold or established a position in the company.
References
SEC: Beginners' Guide to Financial Statements
Terry.uga.edu: How to Read a Financial Statement
For more information on personal investing or investing in stocks see:
Financial Statements – Non-Profit Financial Statement Analysis
Corporate Finances – Understanding Corporate Financial Results
Accounting Standards–US & International Accounting–GAAP & IFRS
Stock Trading Tips - How to Make Money in the Stock Market
Trading Options – Requirements for Trading Stock Options
How to Trade Biotech Stocks...and Make Money! Financial Advice
Clayton Browne - Clayton Browne has a BA and an MS in Anthropology, and has been writing professionally since 1994. He worked for many years in both ...
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