A Guide to Analyzing Financial Statements

A Guide to Analyzing Financial Statements

Reports on a company's financial activity over a specified time period are known as financial statements. Monthly, quarterly, or yearly financial reports are typically sent to the board of directors, shareholders, and investors by most enterprises and organizations. They are analyzed to spot financial patterns, achievements, and issues. These reports are straightforward, despite being drafted by accountants or finance teams. 

Look at the income statement, balance sheet, and cash flow statement when reading a financial report

Point out the span of time that the report's finances cover. In most cases, the time frame is presented at the beginning of the report or the statement.

Check out the financial statement. The company's assets and debts are detailed in the balance sheet.

Check out the structure of the balance sheet. Some reports will place the assets on the right and the liabilities on the left, while others will place the assets on top and list the obligations afterward.

Check out the files. Cash, investments, real estate, and other valuable possessions are all examples of firm assets. Here, liquid assets are placed ahead of less liquid ones. It begins with the cash and other easily convertible assets.

Think about the potential risks. The corporation has liabilities if it owes money to other people. Rent, salaries, taxes, loans, and debts to other suppliers and subcontractors are all examples. The asset segment is balanced when the liability and equity sections are added together. The equity section details the total worth of all capital contributed to the company.

You should differentiate between short-term and long-term obligations. The term "current liability" refers to debts that must be settled within a year. It will take longer than a year to resolve the long-term obligations.

The total of a company's assets must always equal the total of its liabilities plus its shareholders' equity. If that's not the case, it's likely because the financial statement was poorly reported.

Check out the profit and loss statement. The revenue for the reported time period will reveal the company's financial health. The costs incurred to produce that revenue will also be accounted for.

Take a look at the top line, which should show "sales" or "gross revenue." what was earned by the corporation through selling its goods or rendering its services, before deducting all costs.

Examine the selling price of goods. This is the negative number that comes right after the revenue or sales number. This is the cost to the company, in dollars, that was incurred directly to generate this sales or income total.

The profit made by the company before deducting the cost of doing business is known as the "gross profit," which is the difference between sales or revenue and the cost of goods sold. This statistic should always be positive; if it is negative, the firm is unsustainable.

Check the running costs. In this context, "operating costs" refer to things like payroll, advertising, and other charges.

Be mindful of the declining line. The time value of money calculates how much something costs a company over the time it can be used.

Examine the operating profit, which is the money left over after deducting the operating costs; this is calculated by taking the gross profit and subtracting the operating costs.

Take a look at the total interest earned and disbursed. If interest is paid, this is known as finance expenses, and if interest is received, it is known as finance income. A company incurs finance costs when it borrows money at an interest rate, and it gets finance revenue when it lends money at an interest rate or profits from the sale of money market securities.

Verify the withholding amount that was used to calculate your income

Refer to the balance sheet's final digit. The net gain or loss can be seen here.

Check out the statement of cash flows. This number will provide the current cash on hand for the business. Funds entering and leaving the business during that time period will also be recorded.

First, you should learn about the business operations. This section breaks down how cash was spent within the organization to arrive at a net profit or loss.

Inquire about the status of the investments. Earnings from investments and sales of assets are reflected in this section of the cash flow statement.

Review the money-related actions. What the corporation has done in terms of repaying debts and acquiring new debts, including bank loans, is recorded here.

If you still have concerns after doing so, you might want to review the relevant materials. Receipts and invoices are examples of supporting papers that can be used to shed light on a transaction's circumstances.