How to Read Financial Statements: A Beginners Guide

financial statements

With those questions in mind, here’s a quick guide to the three main types of financial statements and what investors should pay close attention to. The income statement is also sometimes referred to as a profit-loss statement or an earnings statement. They’re a snapshot of your company’s finances and give crucial information about your business performance. If you’ve made it this far, you’re ready to take the next step and incorporate financial statements into your workflow and processes.

“Financial statements show the sustainability of your business and allow you to make educated financial decisions to ensure it is as successful as it can be,” says Grant Godfrey, a Senior Account Manager at BDC. Accounting & Financial Planning Services for Attorneys and Law Firms are also used by bankers, investors and others to assess the health and liquidity of your business and make decisions that affect it. If an “other” item has a high dollar amount, find out what it is and if it’s likely to recur. If a company has consistent declining revenues over the years, it’s not a good investment. Income statement accounts are known as temporary accounts because the account balances adjust to zero at the end of each month and year.

Guide to understanding financial statements

Fourth, financial statements only provide limited information about a company’s competitive position. Non-operating items are all the other revenues and expenses that are not part of the business’s main operations. These include interest expenses, interest income, proceeds from sale of extraordinary items, lawsuit expenses, and taxes. These are compiled using Generally Accepted Accounting Principles (GAAP). GAAP is a set of guidelines and standards U.S.-based companies must follow when preparing their financial statements. While financial statements are used internally to guide management decisions, they are also used by external stakeholders such as investors, creditors, analysts, and regulators.

Investors can find a publicly traded company’s in its annual report or a 10-K filed with the SEC. Financial statements provide investors with information about a company’s financial position, helping to ensure corporate transparency and accountability. Understanding how to interpret key financial reports, such as a balance sheet and cash flow statement, helps investors assess a company’s financial health before making an investment. Investors can also use information disclosed in the financial statements to calculate ratios for making comparisons against previous periods and competitors. Investors in bonds or stocks tend to place primary emphasis upon the earnings statements and less upon the balance sheet, save as the latter suggests risk because of unliquidity and insolvency. Retained earnings represent the excess of cash inflow from revenues, less outflow from expenses and dividend distributions.

Which company financial statements are the most important?

While accountants and finance specialists are trained to read and understand these documents, many business professionals are not. In consolidated financial statements, all subsidiaries are listed as well as the amount of ownership (controlling interest) that the parent company has in the subsidiaries. We all remember Cuba Gooding Jr.’s immortal line from the movie Jerry Maguire, “Show me the money! They show you where a company’s money came from, where it went, and where it is now. If you can read a nutrition label or a baseball box score, you can learn to read basic financial statements.

Using the financial ratios derived from the balance sheet and comparing them historically versus industry averages or competitors will help you assess the solvency and leverage of a business. For example, in the income statement shown below, we have the total dollar amounts and the percentages, which make up the vertical analysis. Many regulators use such messages to collect financial and economic information.

Ask a Financial Professional Any Question

The cash flow statement displays the change in cash per period, as well as the beginning and ending balance of cash. In the United States, especially in the post-Enron era there has been substantial concern about the accuracy of financial statements. A balance sheet provides detailed information about a company’s assets, liabilities and shareholders’ equity.

financial statements

Leave a Comment

Your email address will not be published. Required fields are marked *