How to Read Large Numbers on Financial Statements

The statements are open to interpretation, and as a result, investors often draw vastly different conclusions about a company’s financial performance. Companies should create an income statement at the end of each fiscal year. While there are many lines of information, the key data business owners look at start with total revenues on the top line. This brochure is designed to help you gain a basic understanding of how to read financial statements. Just as a CPR class teaches you how to perform the basics of cardiac pulmonary resuscitation, this brochure will explain how to read the basic parts of a financial statement.

Please remember that the diverse nature of business activities results in a diverse set of financial statement presentations. This is particularly true of the balance sheet; the income statement and cash flow statement are less susceptible to this phenomenon. The financial statements used in investment analysis are the balance sheet, the income amended tax return statement, and the cash flow statement with additional analysis of a company’s shareholders’ equity and retained earnings. Although the income statement and the balance sheet typically receive the majority of the attention from investors and analysts, it’s important to include in your analysis the often overlooked cash flow statement.

Statement of Changes in Shareholder Equity

The information it provides will serve as the basis for all other reports. There are quite literally thousands of different financial statements used in the modern world. However, only three are generally used for private companies, plus an additional one for publicly traded organizations.

• If a company buys a piece of machinery, the cash flow statement would reflect this activity as a cash outflow from investing activities because it used cash.
• Rounding the financial data down makes reading the financial statement easier.
• Knowing how to work with the numbers in a company’s financial statements is an essential skill for stock investors.
• Local media reports said two workers died in clashes with police in Gazipur on Monday while some blocked roads and set fire and vandalized several factories.
• Also, purchases of fixed assets such as property, plant, and equipment (PPE) are included in this section.

On the other hand, interest expense is the money companies paid in interest for money they borrow. Some income statements show interest income and interest expense separately. The interest income and expense are then added or subtracted from the operating profits to arrive at operating profit before income tax.

It will not train you to be an accountant (just as a CPR course will not make you a cardiac doctor), but it should give you the confidence to be able to look at a set of financial statements and make sense of them. The key to creating successful, accurate, and optimized financial statements is to constantly look for ways to improve. As your business continues to grow, lean heavily into your statements’ reporting process to discover new opportunities both now and in the future. The truth is, anyone in the modern ecommerce industry has the ability to create financial statements.

Nonprofit entities use a similar but different set of financial statements. Knowing how to work with the numbers in a company’s financial statements is an essential skill for stock investors. The meaningful interpretation and analysis of balance sheets, income statements, and cash flow statements to discern a company’s investment qualities is the basis for smart investment choices. 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.

Can a bookkeeper prepare financial statements?

A company’s debt level might be fine for one investor while another might have concerns about the level of debt for the company. Below is a portion of ExxonMobil Corporation’s cash flow statement for fiscal year 2021, reported as of Dec. 31, 2021. We can see the three areas of the cash flow statement and their results. Also, purchases of fixed assets such as property, plant, and equipment (PPE) are included in this section. In short, changes in equipment, assets, or investments relate to cash from investing. Investors can also see how well a company’s management is controlling expenses to determine whether a company’s efforts in reducing the cost of sales might boost profits over time.

Generally Accepted Accounting Principles (GAAP) are the set of rules by which United States companies must prepare their financial statements. It is the guidelines that explain how to record transactions, when to recognize revenue, and when expenses must be recognized. International companies may use a similar but different set of rules called International Financial Reporting Standards (IFRS). Although financial statements provide a wealth of information on a company, they do have limitations.

Nonprofit Financial Statements

The resulting ratios and indicators must be viewed over extended periods to spot trends. Please beware that evaluative financial metrics can differ significantly by industry, company size, and stage of development. If a company buys a piece of machinery, the cash flow statement would reflect this activity as a cash outflow from investing activities because it used cash. If the company decided to sell off some investments from an investment portfolio, the proceeds from the sales would show up as a cash inflow from investing activities because it provided cash. Next companies must account for interest income and interest expense. Interest income is the money companies make from keeping their cash in interest-bearing savings accounts, money market funds and the like.

Depending on the size and scope of your business, financial statements may be used to craft annual reports. These provide a bird’s-eye view of your company’s yearly profits, which may or may not be necessary to prepare for next year. If you are a publicly owned company, you are required by law to provide shareholders with certain annual financial statements. The cash flow statement (CFS) measures how well a company generates cash to pay its debt obligations, fund its operating expenses, and fund investments. The cash flow statement complements the balance sheet and income statement.

Current assets are things a company expects to convert to cash within one year. Most companies expect to sell their inventory for cash within one year. Noncurrent assets are things a company does not expect to convert to cash within one year or that would take longer than one year to sell.

Example of MM in Financial Statements

Both conventions differ in how they report asset values, depreciation, and inventory. GAAP typically requires more disclosures than IFRS, with the latter providing much less overall detail. The presentation of a company’s financial position, as portrayed in its financial statements, is influenced by management’s estimates and judgments. In the best of circumstances, management is scrupulously honest and candid, while the outside auditors are demanding, strict, and uncompromising. Whatever the case, the imprecision that can be inherently found in the accounting process means that the prudent investor should take an inquiring and skeptical approach toward financial statement analysis.

If a company has a debt-to-equity ratio of 2 to 1, it means that the company has two dollars of debt to every one dollar shareholders invest in the company. In other words, the company is taking on debt at twice the rate that its owners are investing in the company. In the example below, ExxonMobil has over $2 billion of net unrecognized income. Instead of reporting just $23.5 billion of net income, ExxonMobil reports nearly $26 billion of total income when considering other comprehensive income. The CFS allows investors to understand how a company’s operations are running, where its money is coming from, and how money is being spent. The CFS also provides insight as to whether a company is on a solid financial footing.

Example of a Balance Sheet

This is important because a company needs to have enough cash on hand to pay its expenses and purchase assets. While an income statement can tell you whether a company made a profit, a cash flow statement can tell you whether the company generated cash. A balance sheet shows a snapshot of a company’s assets, liabilities and shareholders’ equity at the end of the reporting period.

What Key Financial Statements Should I Understand When Analyzing a Company?

Similar to the balance sheet, positive equity shows excellent health and strong growth—something shareholders are extremely keen to monitor. In the ecommerce industry, there are many types of people who may be responsible for financial statements. Very small brands may delegate this process to the owner, while larger companies may rely on CPAs or accountants to get the job done. Other businesses may have outsourced professionals or freelancers who specialize solely in financial statements.