As an individual or an investor, it is crucial to understand the basics of financial statements. Understanding the financial statements of a company can help you to make informed decisions about investing, managing finances or making financial decisions, and determine the overall health of a company. There are three basic financial statements that one needs to understand when talking about financial statements. They include the balance sheet, income statement, and cash flow statement. In this article, we will guide you through how to read these financial statements.
Balance Sheet
The balance sheet is a snapshot of a company’s financial status at a given time by showing its assets, liabilities, and equity. The asset side includes cash, accounts receivables, inventories, and investments. On the other hand, the liability side includes accounts payables, loans, and other debts. Equity comprises the remaining value, which is the value of the assets over and above the remaining debts. The balance sheet’s primary formula is assets equal liabilities plus equity. Examining the balance sheet will give you an idea of the company’s liquidity or working capital, which will help you to make informed decisions on the company’s financial status.
Income Statement
The income statement reports the profitability of a company over a specific period. It includes the revenues, expenses, and net income. The revenue side shows the money received from the sale of products, goods, or services. On the other hand, expenses are the costs of producing or selling the goods or services provided. This statement’s formula is revenue minus expenses equal to net income. It indicates how much money the company gained or lost over a specific period. By analyzing the income statement, you can determine the company’s profit margin and operating costs and decide on the company’s potential profitability.
Cash Flow Statement
The cash flow statement shows the company’s inflow and outflow of cash and cash equivalents over a specific period. It indicates how the company received or spent its money. It includes operating activities, investing activities, and financing activities. Operating activities represent the cash inflows and outflows incurred in the company’s daily operations. Investing activities represent the cash inflows and outflows incurred in capital projects or investments. Financing activities represent the cash inflows and outflows incurred through bond issuing, share issuing or repurchase, or dividend payments. Understanding this statement will help you to determine the company’s financial health, including its ability to generate cash, pay its bills, and fund investments.
In conclusion, understanding financial statements is a vital part of understanding a company’s financial health. By analyzing each financial statement, one can make better investment decisions and determine if a company’s financial position is improving or deteriorating. Additionally, there are many tools online one can use to deep dive an analysis of these financial statements; you can also monitor a company’s financial news online for detailed analysis of these statements to complement your knowledge.
