Understanding Financial Statements

Financial Statements

Overview

• Financial statements are written records of a company's financial activities and performance
• They provide stakeholders with information to make informed decisions

Types of Financial Statements

• Balance Sheet: snapshot of a company's financial position at a specific point in time
  • Assets = Liabilities + Equity
• Income Statement (Profit and Loss Statement): summary of revenues and expenses over a specific period of time
  • Revenues - Expenses = Net Income
• Cash Flow Statement: summary of a company's inflows and outflows of cash over a specific period of time
  • Operating, Investing, and Financing activities
• Statement of Changes in Equity: summary of changes in a company's equity over a specific period of time
  • Changes in retained earnings, dividends, and share capital

Key Components of Financial Statements

• Assets: resources owned or controlled by a company
  • Current assets (e.g., cash, accounts receivable)
  • Non-current assets (e.g., property, equipment)
• Liabilities: debts or obligations owed by a company
  • Current liabilities (e.g., accounts payable, short-term loans)
  • Non-current liabilities (e.g., long-term loans, mortgages)
• Equity: ownership interest in a company
  • Common stock, retained earnings, and dividends
• Revenues: income generated from a company's operations
  • Sales, services, and other sources
• Expenses: costs incurred by a company to generate revenues
  • Operating expenses (e.g., salaries, rent), non-operating expenses (e.g., interest, taxes)

Analysis and Interpretation

• Ratios: used to analyze and interpret financial statements
  • Liquidity ratios (e.g., current ratio, quick ratio)
  • Profitability ratios (e.g., gross margin, return on equity)
  • Efficiency ratios (e.g., asset turnover, inventory turnover)
• Trend analysis: examination of changes in financial statement items over time
• Industry comparison: comparison of a company's financial performance with industry averages or benchmarks

Financial Statements

Overview

• Financial statements provide stakeholders with financial information to make informed decisions
• Written records of a company's financial activities and performance

Types of Financial Statements

Balance Sheet

• Snapshot of a company's financial position at a specific point in time
• Assets = Liabilities + Equity

Income Statement (Profit and Loss Statement)

• Summary of revenues and expenses over a specific period of time
• Revenues - Expenses = Net Income

Cash Flow Statement

• Summary of a company's inflows and outflows of cash over a specific period of time
• Operating, Investing, and Financing activities

Statement of Changes in Equity

• Summary of changes in a company's equity over a specific period of time
• Changes in retained earnings, dividends, and share capital

Key Components of Financial Statements

Assets

• Resources owned or controlled by a company
• Current assets: cash, accounts receivable
• Non-current assets: property, equipment

Liabilities

• Debts or obligations owed by a company
• Current liabilities: accounts payable, short-term loans
• Non-current liabilities: long-term loans, mortgages

Equity

• Ownership interest in a company
• Common stock, retained earnings, and dividends

Revenues

• Income generated from a company's operations
• Sales, services, and other sources

Expenses

• Costs incurred by a company to generate revenues
• Operating expenses: salaries, rent
• Non-operating expenses: interest, taxes

Analysis and Interpretation

Ratio Analysis

• Used to analyze and interpret financial statements
• Liquidity ratios: current ratio, quick ratio
• Profitability ratios: gross margin, return on equity
• Efficiency ratios: asset turnover, inventory turnover

Trend Analysis

• Examination of changes in financial statement items over time

Industry Comparison

• Comparison of a company's financial performance with industry averages or benchmarks

Learn about the different types of financial statements, including balance sheets and income statements, and their role in providing stakeholders with information to make informed decisions.