Understanding a Financial Report
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Publicly traded companies produce three commonly used financial reports:
1. Balance Sheet
2. Income Statement
3. Statement of Cash Flow
Generally all three are part of the quarterly and annual financial statements. Let's discuss the Balance Sheet.
The Balance Sheet contains what is owned (assets), what is owed (liabilities), and what, it anything is left over (equity). Remember, the balance sheet only shows what the company's financial position is at one given moment.
Assets are items that have a maturity of no more than 1 year. Your checking account is an example of assets. There are typically 5 categories of current assets:
1. Cash and cash equivalents
2. Short term investments
3. Accounts receivable
4. Inventories
5. Other current assets (ie work in progress)
Long term assets include fixed assets ie real property, intangibles, assets (ie a patent) some investments (ie a partnership). They are items that are meant to last more than a year.
Current Liabilities are debts payable within 1 year, such as electric bills, or sales taxes. We can group current liabilities into 5 categories, also:
1. Accounts payable (monthly bills, invoices, etc.)
2. Short term borrowings (such as to meet payroll)
3. Income taxes payable
4. Deferred income taxes (an accounting procedure)
5. Other current liabilities
Long term liabilities are debts due in over 1 years time such as bank loans
Equities. To put it simply Equity is the total assets minus the total liabilities. It is the part of the company the shareholders own. There are 3 parts to equity:
1. Common stock – a minimal share value
2. Paid-in capital – an accounting share value
3. Retained earnings- the equity over the years in the form of profits or losses.
Analyzing financial statements is not an easy chore. Entire practitioners are made of doing so. It is a process to determine the soundness and stability of a company. All parts of the statement are important and all parts need to be studied to make a sound investment decision.