Understanding how to analyze financial statements is key for investors to know what is going on with a particular company. By applying financial statement analysis techniques to a company's documents, investors can make sound decisions regarding the financial health of the company.
What A Financial Statement Is
A financial statement is a formal record that includes a balance sheet, income statement, statement of cash flow and a statement of earnings. Each section offers particular information about a company that, when read correctly, can offer insight into the financial health of the business.
Balance sheets are a part of the statement that discloses the company assets and liabilities. It's a picture of what the company owns, as well as what it owes, at any particular moment. Assets are the company's resources, whether tangible or intangible. Examples include buildings, equipment, trademarks, patents and stocks. Liabilities are the debts a company owes, such as loans or taxes. The balance sheet is accurate up through a certain point in time, as assets and liabilities constantly shift. Shareholder's equity is also shown on a balance sheet and equals a company's net worth.
This is also called a profit and loss statement and reveals how a company plans to spend income or revenue to make a profit. An income statement will show the earnings per share, or what the stockholders would be entitled to for that period. It can show if a company has posted profits or losses for a particular time and can give glimpses as to how profitable a company has been in the past, as well as predict future earnings.
Statement Of Cash Flow
The cash flow statement separates the company finances into several subcategories, including investments, operating expenses and repayment plans. It helps paint a complete picture as to whether a company generated cash and how the company plans to cover short-term expenses. The cash flow statement can provide investors or company employees with a look at the company's potential for liquidation at any given time.
Statement Of Retained Earnings
These statements are broken up into time periods or reporting periods. It reflects the accumulation of earnings, minus net profit and loss. This gives investors and owners the opportunity to examine changes in the retained earnings.
Accounting for outstanding checks can be time-consuming and troublesome, but you'll want to make sure you do so on a regular basis to prevent serious balance sheet reconciliation problems later.