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