How to Read a Financial Report: A Beginner’s Guide
A financial statement allows whoever is interested in it to understand its financial position. It helps understand the respective business on its own, but also within the industry it operates in.
Of course, a review isn’t just a document, but it could also be a mix of a few different audits, such as a balance sheet, an income statement or even a cash flow statement. Throw in the annual reports and you have the bigger image.
Understanding how to read a financial report may seem tricky at first, but here’s a quick guide to figure the basics out.
Reading the Balance Sheet
The financial statement review starts with the balance sheet, which covers the book value of the respective business. It showcases the resources, their availability and the financing behind them.
Those reading the audit will also see the liabilities and assets, not to mention the owners’ equity. Each component tells a different story about the company’s financial health.
In theory, the way it should be seen revolves around the assets, which come together as the sum of all liabilities and the owners’ equity. What does each of these things mean then?
- Assets cover what the company owns.
- Liabilities cover the debt to debtors.
- Owners’ equity covers the overall net worth of the business.
The balance sheet serves as an important financial document that helps stakeholders understand the company’s financial position at a specific point in time.
Reading the Income Statement
The income statement covers the effects of gain, expense, revenue and even loss transactions. It’s given over a particular period of time, such as every three or 12 months.
The revenue is what goes in, while expenses cover what goes out. Cost of goods sold is the cost of the production, import or manufacturing of whatever the respective business sells.
The gross profit is the total revenue, but without the costs of goods sold.
While these are the main things, there’s more to cover:
- Operating income, the profit without expenses.
- Income before taxes.
- Net income is the income before taxes, but without the actual taxes.
- Earnings per share is the net income divided by the amount of shares.
- Depreciation refers to how assets lose value with time.
All these things will help you understand if a business is profitable, how much it spends to produce something, whether or not there’s some cash to go back into it and so on. Financial trends are also considered in this audit.
Reading the Cash Flow Statement
The cash flow statement is extremely important when learning how to read a financial report. It offers a bigger image of what happened to the cash during a particular period of time.
This document provides critical insights into how a company manages and generates cash, which is different from accounting profits.
You’ll find sections like operating activities (money generated once the goods or services are delivered), investing activities (money from buying or selling assets) and financing activities (cash flow from equity financing and debt).
Reading the Annual Report
The annual report covers financial and operational conditions. It’s a requirement and it’s usually done on a yearly basis. It covers all sorts of information, from activities and benchmarks to the actual achievements of the respective company. It helps potential investors, employees and shareholders.
The annual report covers the income statement, cash flow statement and balance sheet, so it’s a mix of everything you’ve already been too.
However, it also includes extra details like management’s discussions and analyses, not to mention insights into the respective industry and even investor information to attract more money.
