Financial Statements: Composition and Meaning

Financial statements designed to present the financial position of an entity at a point in time or for a specified period of time. Most accounting standards require entities to prepare financial statements to Generally Accepted Accounting Principles (GAAP) or follow International Financial Reporting Standards (IFRS). These reports allow management to assess performance against business goals, identify potential risks and opportunities, and balance short-term profits with long-term growth. Let's Johnson's Blog Learn more about financial statements in the following articles.

What are Financial Statements?

Financial statements are a collection of reports that provide information about a company's financial position and performance. These reports are used by internal and external stakeholders to assess a company's financial position and make informed decisions.

These reports are usually prepared quarterly and annually, and are audited by an independent accounting firm to ensure accuracy and compliance with accounting standards.

Financial statements are an overview of the health of a business at a particular point in time. They can be used to show how well a business is performing financially and what its liabilities and assets are. In this way, financial statements provide valuable insights to investors and creditors.

Businesses should review their annual financial statements to stay ahead of trends and make decisions. That way, they can make decisions that improve the financial health and performance of the business.

Why use Financial Statements?

Financial statements are a valuable tool for investors and managers in making informed financial decisions. They can help investors and managers gauge a company's performance against others in the same industry or market, making comparisons over time and identifying trends easier. easier.

There are several reasons for financial reporting, including:

Make decision: Financial statements provide important information that can be used to make informed business decisions. For example, a revenue statement can help a business owner determine which products or services are most profitable, while a balance sheet can help lenders assess a business's ability to repay debt.

Planning and budgeting: Financial statements can be used to generate financial projections and budgets, helping to plan the business for future growth and expansion.

Compliance: Financial statements are often required by law to be filed with government agencies, such as the Securities and Exchange Commission or the Tax Office. This ensures that businesses are following financial reporting guidelines and regulations.

Transparency and Accountability: Financial statements provide a clear picture of a company's financial position and performance, which can help increase transparency and accountability to shareholders, investors and stakeholders. other authority.

Identify trends: Financial statements allow one to track the trends and patterns of a company's financial performance over a certain period of time. This information can be used to identify weaknesses or strengths and adjust accordingly.

Credit reputation: Financial statements are commonly used by lenders and investors to gauge a company's creditworthiness and ability to repay debt.

Risk management: Financial statements can be used to identify potential risks and opportunities, and develop strategies to manage them.

Financial reporting can also be an important part of corporate governance. They provide an overview of a company's financial position, including the income statement, balance sheet, and cash flow statement. This information helps shareholders understand the financial position of the business and provides them with valuable insights into the financial position of the organization.

Types of Financial Statements

There are several types of financial statements commonly used to provide information about a company's financial position and performance. The most common financial statements are:

• Balance Sheet: Balance Sheet represents a company's assets, liabilities, and equity at a particular point in time. It provides an overview of a company's financial position, including its assets, such as cash, investments and real estate, and its liabilities, such as as loans and payable.
• Income statement: Income statement or Profit and Loss Statement (P&L) showing revenue, expenses and net income company over a period of time. It provides information about a company's financial performance, including revenue, Cost of goods sold and operating costs.
• Cash Flow Statement: Cash Flow Statement represents a company's cash inflows and outflows over a period of time. It provides information about a company's liquidity and ability to generate cash, including cash flows from operating, investing and financing activities.
• Report on shareholders' equity: Report on shareholders' equity shows the changes in a company's equity over a period of time. It provides information about a company's ownership structure and changes in capital structure, including retained earnings, common stock, and dividends.
• Statement of Comprehensive Income: The comprehensive income statement shows the changes in a company's net assets over a period of time. It includes net income and other comprehensive income items such as foreign currency conversion adjustments and unrealized gains or losses.
• Notes to the financial statements: Notes to the financial statements provide additional information and explanations about the amounts and disclosures in the financial statements.

Balance Sheet

Balance Sheet is a financial statement that shows a company's assets, liabilities and equity at a specific point in time. It provides an overview of a company's financial position and is often used to evaluate creditial, solvency and overall financial position of the company.

The balance sheet is divided into two parts: assets and liabilities. The assets section lists resources that the company owns or controls, such as cash, investments, receivables, inventory and property. The liability section lists the debts and obligations a company owes, such as loans, accounts payable, and taxes owed.

The difference between a company's assets and liabilities is known as equity, also known as shareholder's equity, which represents the residual interest in an entity's assets that remains after deductions. take the debt.

The balance sheet equation:
Assets = Liabilities + Equity

A balance sheet is a financial statement that summarizes a company's assets, liabilities, and net worth at a given point in time. This report can be used to assess the financial health of a company. For example, if a company has more assets than liabilities, it is said to have positive cash flow, meaning it is generating income from its business. Similarly, if a company has more liabilities than assets, it is called negative cash flow, which means it is financing its businesses with loans and cash flow from operations. business.

The balance sheet is used in conjunction with other financial statements, such as the income statement and cash flow statement, to provide a complete picture of a company's financial position. the company.

Assets

An asset is a resource that a company owns or controls that has economic value and is expected to provide future economic benefits. They are recorded on the balance sheet and grouped into categories based on their characteristics and how they are used by the company.

There are several types of assets, including:

Short-term assets: These are assets that are expected to be converted to cash or used up within a year, such as cash, accounts receivable and inventory.

Long-term assets: These are assets that are not expected to be converted to cash or used up within a year, such as property, plant and equipment, as well as intangible assets such as patents and trademark.

Financial assets: These are assets of a financial nature, such as investments in stocks, bonds, and other securities.

Long-term investment: These are investments held by the company for a longer period of time, such as real estate and capital investments in other companies.

Fixed assets: These are assets that are used in the operations of the company and are expected to be used for a long time. Examples include property, plant, and equipment.

Tangible assets: These are tangible assets such as plant and equipment.

Invisible treasure: These are intangible assets such as patents, trademarks.

Liabilities

Liabilities are debts or obligations that one company owes to another. They are recorded on the balance sheet and grouped into categories based on their characteristics and when they are expected to be paid.

There are several types of liability, including:

Current liabilities: These are obligations that are expected to be paid within a year, such as accounts payable, short-term loans, and tax liabilities.

Long-term liabilities: These are obligations that are not expected to be settled within a year, such as long-term loans, bonds, and pension obligations.

Financial debt: These are debts of a financial nature, such as loans, mortgages, and bonds.

Latent debt: These are contingent liabilities that may or may not arise depending on the outcome of a particular event or condition, such as lawsuits or product warranty claims.

Accumulated debt: These are obligations that have arisen but have not been paid or recognized, such as wages and rent.

Deferred liabilities: These are obligations that will be settled in the future, such as tax liabilities or rental obligations.

Equity

Equity, also known as shareholders' equity, represents the residual interest in an entity's assets remaining after deducting liabilities. It is the part of the company that is owned by the shareholders. It is recorded on the balance sheet and can be divided into several categories, including:

• Common shares: Value of company shares held by shareholders.
• Retained earning: The part of the company's profits that has been retained by the company and has not been distributed to shareholders as dividends.
• Treasury shares: The value of company shares that have been acquired by the company and are held in the company's own treasury.
• Additional capital contribution: The amount that the shareholders have invested in the company exceeds the par value of the shares.
• Other cumulative comprehensive income: The portion of corporate earnings that is not included in retained earnings, such as foreign currency conversion gains and losses and certain pension plan components.

Equity is used to gauge a company's financial health by measuring a company's net assets (assets minus liabilities) and its ability to generate future income and growth. A company with a high level of equity is considered financially stable and is more likely to withstand financial challenges.

Example of a Balance Sheet

A balance sheet is a financial statement that shows a company's assets, liabilities, and equity at a specific point in time. It is used to assess a company's liquidity, solvency, and overall financial health.

Here is an example of an XYZ company's balance sheet.:

Balance Sheet

As of December 31, 2022

Asset:

Liquid assets:

• Cash and cash equivalents: 50,000 USD
• Accounts Receivable: 75,000 USD
• Inventory: 100,000 USD
• Prepayment fee: 25,000 USD
• Total current assets: 250,000 USD

Long-term assets:

• Property, plant and equipment: 1,000,000 USD
  Intangible assets: $250,000
  Long-term investment: 500,000 USD
  Total long-term assets: 1,750,000 USD
• Total assets: 2,000,000 USD

Liabilities must pay:

Short-term debt:

• Account Payable: 50,000 USD
• Short-term loan: 75,000 USD
• Tax owed: $25,000
• Total current debt: 150,000 USD

Long-term liabilities:

• Long-term loan: 500,000 USD
• Bonds payable: 250,000 USD
• Retirement obligation: 100,000 USD
• Total long-term debt: 850,000 USD
• Total liabilities: 1,000,000 USD

Equity:

• Common Shares: 500,000 USD
• Retained profit: 300,000 USD
• Treasury shares: 50,000 USD
• Additional capital contribution: 150,000 USD
• Total equity: 1,000,000 USD

Total liabilities and equity: 2,000,000 USD

In this example, the balance sheet shows that the company has assets of $2,000,000 and liabilities of 1,000,000 USD, which means the company's equity is 1,000,000 USD.

It is important to note that the balance sheet should always be read along with other financial statements, such as the income statement and cash flow statement, to provide a picture. overview of the company's financial position.

Income Statement

Income statement, also known as profit and loss (P&L) statement, is a financial statement that shows revenue, expenses and net income (profit or loss) of a company for a specific period of time, usually a year or a quarter. It is used to evaluate a company's financial performance and to identify trends in the company's revenue and expenses.

The income statement is one of the three main financial statements along with the balance sheet and statements of cash flows, which provides a summary of a company's financial performance over a period of time, usually a financial year.

The report usually starts with revenue, then lists all the costs incurred to generate that revenue, such as Cost of goods sold, operating costs, depreciation, amortization and interest. It provides an overview of how much money a company made or lost during that period.

Revenue

Revenue is income generated from the sale of goods or services or from other business activities such as interest or investment. It is a key measure of a company's financial performance and is often the top entry on the income statement.

Revenue is considered the “top line” because it is reported at the top of the income statement before any expenses are deducted. It is also considered a measure of a company's sales performance.

There are different types of revenue, such as:

• Sales: income generated from the sale of goods or services.
• Investment revenue: income generated from investments in stocks, bonds or other securities.
• income: income generated from interest earned from savings or investment accounts.
• Rental revenue: income generated from the rental of property or equipment.

Revenue is an important metric for investors and analysts as it is a key driver of a company's bottom line. A company with high revenues but high costs may not be as profitable as a company with lower revenues but lower costs.

It is also important to note that revenue is not the same as profit, because it does not take into account the costs and expenses incurred to generate that revenue.

Expense

Expenses are expenses incurred by a company to generate revenue. Expenses are usually subtracted from sales to calculate net income (profit) on the income statement.

There are different types of expenses, such as:

• Cost of Goods Sold (COGS): direct costs to produce and sell a product or service, such as materials, labor, and production costs.
• Operating costs: the costs of running a business, such as rent, utilities, salaries, and marketing expenses.
• Depreciation: allocating the cost of a long-term asset over its useful life.
• Interest expense: the cost of borrowing money.
• Tax: the amount paid to the government in taxes.

Costs are an important metric for investors and analysts as they can indicate a company's efficiency and profitability. A company that can generate high revenues while keeping costs low will often be more profitable than a company with lower revenues but higher costs.

Expenses are reported on the income statement, usually after revenue is reported. They are subtracted from sales to get the net income or net loss of the company.

It's important to note that some expenses, such as R&D, may not be reflected in the current period's income statement but are important to future growth, so they are reported. reported in the balance sheet as an intangible asset.

Earnings per share or EPS

Earnings per share (EPS) is a financial ratio commonly used to measure a company's profitability. It is calculated by dividing the company's net income (profit) by the number of common shares outstanding. The resulting figure is the amount of profit earned per share.

EPS is considered an important metric for investors and analysts because it provides a measure of how much money a company earns per share. A company with a high EPS is generally considered more profitable than a company with a low EPS.

EPS can be used to evaluate a company's performance over time and to compare one company's performance with another. It is also commonly used to evaluate a company's stock performance and make investment decisions.

EPS is usually reported on a company's income statement. It is also reported on a company's balance sheet as retained earnings.

There are two types of EPS:

• Basic EPS: calculated only by the number of ordinary shares outstanding.
• Diluted EPS: takes into account additional shares that may be issued in the future, such as through the exercise of a stock call option or the conversion of a convertible bond. Diluted EPS is considered a more conservative EPS measure because it assumes the conversion of all potentially dilutive securities and thus gives a more accurate picture of profitability per share.

EPS is an important financial metric used to evaluate a company's performance over time and to compare its performance with the performance of other companies in the same industry.

EPS helps investors understand a company's profitability over time, as well as its ability to generate profits from its operations. By comparing EPS figures from quarter to quarter, investors can see if a company has been profitable over time or if there have been any significant changes in the company's financial results. are not.

Income Statement Example

Here is an example of an income statement for a company XYZ., for the year ended December 31, 2022:

Income statement
For the year ending December 31, 2022

Revenue:

• Product sales: 10,000,000 USD
• Service revenue: 5,000,000 USD
• Total revenue: 15,000,000 USD

Expense:

• Cost of goods sold: 6,500,000 USD
• Operating costs: 3,500,000 USD
• Depreciation and Depreciation: 500,000 USD
• Interest expense: 100,000 USD
• Tax: 1,000,000 USD
• Total cost: 11,600,000 VND

Net Income (Profit): 3,400,000

This income statement shows that XYZ. Have gross revenue is $15,000,000 for the year ended December 31, 2022 and the total cost is $11,600,000. Subtracting expenses from sales results in a net income (profit) of $3,400,000.

It's important to note that this is a simple example, and actual income statements can be much more detailed and complex depending on the company and its operations. But it does give you an idea of the main components of the income statement.

Statements of cash flows

Cash Flow Statement A financial statement that shows a company's cash inflows and outflows over a specific period, such as a month, quarter, or year. It is one of the three main financial statements along with the balance sheet and income statement.

The statement of cash flows provides information about creditial and the company's solvency, which are important indicators of a company's financial position. It helps to understand the cash inflows and outflows of a company and how the company manages its cash. The report is divided into three parts:

• Cash flow from operations
• Cash flow from investing activities
• Cash flow from financing activities

Cash flow from operating activities shows the money generated by the company's main activities, such as sales and expenses.

Cash flow from investing activities shows the cash used or generated by a company's investments in long-term assets such as real estate, plant and equipment, or marketable securities.

Cash flow from financing activities shows the cash generated or used by a company's financial activities such as issuing new debt or equity or repaying existing debt.

Positive cash flow means a company has more money coming in than going out, which is a good sign for its liquidity and solvency. Negative cash flow means that a company has more cash out than it comes in, which can be a warning sign that the company may have trouble meeting its financial obligations in the future.

Operating activities

The operating activities of a business include those that generate cash and help maintain liquidity. These activities can include a variety of activities ranging from revenue generation to costs associated with running the business.

Operating activities refer to the ongoing day-to-day business activities of a company that generate revenue and incur expenses. These activities include selling goods or services, collecting receivables, pay bills and other expenses. In the cash flow statement, the section labeled "cash flows from operations" shows the cash generated or used by the company's primary operations.

Examples of cash inflows from operating activities include money received from customers, interest income, and dividends received. Examples of cash outflows from operating activities include payments to suppliers, wages and salaries, rent, and other operating expenses.

Net cash flow from operations is calculated by subtracting cash inflows from operations. Positive net cash flow from operating activities indicates that the company has generated more cash from operating activities than it uses, and negative net cash flow from operating activities indicates that the company has used more cash from operating activities. business activities than the money generated.

It is important to note that a company can be profitable but still have negative cash flow from its operations. This can happen if the company is investing in growth or if the company has to build inventory or increase accounts receivable. This can also happen if the company is paying off debt or increasing its accounts payable.

Operating cash flow is considered an important indicator of a company's ability to generate cash from its core business. It gives an idea of how well the company is managing its day-to-day operations and whether the company has enough cash to fund its ongoing business operations.

The cash flow statement is helpful in understanding how a company can meet its financial commitments. This report shows how much cash flows in and out of a business over a period of time, providing insight into how the business is performing and whether the business can meet its financial obligations. are not. The cash flow statement also provides information about how effectively a business is generating income and reducing costs. Overall, the operating activities section of the financial statements provides important information about the financial health and stability of a business.

Investment activities

Investing activities refer to a company's acquisition and disposal of long-term assets, such as real estate, plant and equipment (PP&E), investments in marketable securities or other investments. other investment. In the cash flow statement, the section labeled “cash flows from investing activities” shows the cash generated or used by the company's investments in long-term assets.

Examples of cash outflows from investing activities include cash used to purchase PP&E, investments in marketable securities, or other long-term assets. Examples of cash inflows from investing activities include money received from the sale of long-term assets or investments, or dividends and interest received from investments.

Net cash flow from investing activities is calculated by subtracting cash inflows from cash inflows. A positive net cash flow from investing activities indicates that the company has generated more cash from investments than it uses, and a negative net cash flow from investing shows that the company has used more cash from investments compared to the amount generated.

Cash flow from investing activities is important for investors and analysts to understand how a company is using its cash to generate growth and future profits. For example, a company that consistently generates positive cash flow from investing activities may be investing in new revenue-generating assets, such as new stores, plants, or equipment, that can drive growth. Future. Conversely, a company that consistently generates negative cash flows from its investments may have difficulty generating returns on its investments and may be at risk of financial underperformance. Future.

Financial activities

Financing activities refer to a company's activities related to debt and equity financing. These activities include issuing debt and equity securities, repaying debt and paying dividends to shareholders. In the cash flow statement, the section labeled "cash flows from financing activities" shows the cash generated or used by a company's financial activities.

Examples of cash outflows from financing activities include cash used to pay down debt, cash used to pay dividends to shareholders, or cash used to repurchase shares. Examples of cash inflows from financing activities include cash received from the issue of debt or equity securities, or cash received from the sale of a subsidiary or other long-term asset.

Net cash flow from financing activities is calculated by subtracting cash inflows from cash outs. A positive net cash flow from financing activities indicates a company generates more cash from financing activities than it uses, and a negative net cash flow from financing activities indicates a company uses more cash from financing activities amount generated.

Cash flow from financing activities is important for investors and analysts to understand how a company finances its operations and growth. For example, a company that consistently generates positive cash flow from financing activities may issue new debt or equity securities to finance its growth, which may increase its financial risk. main. Conversely, a company that consistently generates negative cash flows from financing activities may have difficulty raising capital and may run the risk of not being able to finance ongoing operations and grow in the future. future.

Cash Flow Statement Example

The cash flow statement provides information about a company's liquidity and solvency, which are important indicators of a company's financial position. It helps to understand the cash inflows and outflows of a company and how the company manages its cash.

Here is an example of a cash flow statement for a company XYZ., for the year ended December 31, 2022:

Cash Flow Statement
For the year ending December 31, 2022

Cash flow from operating activities:

• Net income (profit): 3,400,000 USD
• Adjust for:
• Depreciation and amortization: 500,000 VND
• Increase in receivables: (200,000) USD
• Increase accounts payable: 300,000 USD
• Net cash from operations: $3,900,000

Cash flow from investing activities:

• Purchase of property and equipment: (1,500,000) USD
• Investment in marketable securities: (500,000) USD
• Net cash used in investing activities: (2,000,000) USD

Cash flow from financing activities:

• Proceeds from issuing common shares: $1,000,000
• Long-term debt repayment: $(800,000)
• Net cash provided by financing activities: $200,000

Net increase (Decrease) in cash: 1,100,000 USD

This cash flow statement shows that XYZ has net cash from operations of $3,900,000, net cash used in investing activities of $2,000,000, and net cash from financing activities. is $200,000. Net cash increase for the year was $1,100,000.

It's important to note that this is a simple example, and the actual cash flow statement can be much more detailed and complex depending on the company and its operations. However, this example gives an idea of the key components of a cash flow statement and how it differentiates it from other financial statements.

Report Change in Shareholder's Equity

A statement of changes in shareholders' equity, also known as a statement of retained earnings, is a financial statement that shows the changes in a company's equity over a specific period of time. It provides information on how a company's equity is affected by its net income or loss, dividends, and any other transactions that affect equity.

The shareholder equity change report typically has several sections, including:

• Equity: This section shows the change in the number of shares issued by the company and the corresponding increase and decrease in equity.
• Retained earning: This section shows the change in retained earnings for the period, which is the portion of net income not distributed as dividends to shareholders.
• Other comprehensive income: This section shows other changes in equity that are not included in net income, such as foreign currency conversion adjustments or changes in the value of available-for-sale securities.
• Treasury shares: This section shows the changes in the number of shares the company has repurchased and holds in its own fund.

The statement of changes in shareholder equity is useful for investors and analysts to understand how a company's equity has been affected by financial performance and other transactions. It can provide insight into a company's dividend policy, share buyback program, and other factors that can affect a company's stock value over time.

One way is to subtract assets from liabilities and shareholders' equity, representing net income for the period. Another way is to add financial income with operating income, which represents the cash flow for the period. The report on changes in shareholder equity can also be calculated by dividing net income by the number of shares outstanding, indicating earnings per share for the period.

Comprehensive Income Statement

Comprehensive income statement, also known as statement total income comprehensive, are financial statements that show a company's total income, including net income and other comprehensive income. It provides a more comprehensive view of a company's financial performance than the traditional income statement, which only shows net income.

The comprehensive income statement usually has two parts:

• Net income: This section shows the company's net income or loss for the period, calculated by subtracting expenses from revenue.
• Other comprehensive income: This section shows other changes in equity that are not included in net income, such as foreign currency conversion adjustments, changes in the value of available-for-sale securities, and calculated profit or loss. statistically for defined benefit pension plans.

A comprehensive income statement is useful for investors and analysts to understand a company's entire financial performance. It can provide insight into a company's performance in areas not reflected in traditional income statements, such as foreign currency risk or changes in market value in some investments. certain private.

It's important to note that not all companies have a comprehensive income statement, some use a traditional income statement and others use a combined income statement. Net and Other Comprehensive Income in one report.

• Net income is the key element of the comprehensive income statement. It reflects net income from business activities as income from ordinary operations, such as operating profit, investment income and financial income.
• Other comprehensive income is an income or expense item that is included in net income but is not related to the cash flow statement. It includes items such as unrealized gains and losses on investments, pensions and other post-employment benefits, and foreign currency conversion adjustments.
• Retained earnings are the profit left over by a company after deducting liabilities and equity investments. They are an integral part of a company's financial position and are also the financial statement accounting term that describes the amount of profit remaining after accounting for financial costs.

A statement of comprehensive income is a financial statement that shows a balance sheet item and an income statement item at a point in time.

It can be used to show net income, depreciation expenses, dividends received, interest expenses, and cash flows for a period of time in a single statement.

Notes to the financial statements

Notes to the financial statements are additional information contained in a company's annual report or financial statement. These notes provide additional details and explanations for items presented in the financial statements, such as the balance sheet, income statement, and statement of cash flows.

Some examples of information that may be included in the notes to the financial statements include:

• Accounting Policy: This section provides information about the accounting principles and methods used by the company to prepare its financial statements.
• Significant transactions and events: This section provides information about material transactions or events that occurred during the period and have an effect on the financial statements.
• Contingencies and commitments: This section provides information about any contingencies, such as litigation or guarantees, and commitments, such as purchase orders or letters of credit, that may affect the financial position of the Company. the company.
• Disclosure about related party: This section provides information about any transactions or relationships between the company and its affiliates, such as subsidiaries, parent companies, and major shareholders.
• Parts Information: This section provides information about the company's operations by geographic division, product line, or business division, which can be helpful in understanding the company's performance.
• Next events: This section provides information about any events that occurred after the balance sheet date but before the financial statements were issued.

The notes to the financial statements are an important part of a company's annual or financial statements because they provide additional information that can help investors and analysts understand the financial position and performance of the company.

frequently asked Questions

What do financial statements tell us about a company's performance?

Financial statements provide a detailed picture of a company's financial position and performance. By reviewing consolidated financial statements, investors and analysts can gain a comprehensive understanding of a company's financial performance, including liquidity, solvency, profitability, and stability. finance.

What are the different types of financial statements?

There are four main types of financial statements that companies typically prepare:

• Balance SheetBalance Sheet: A balance sheet is a financial statement that shows a company's assets, liabilities, and equity at a specific point in time. It provides an overview of a company's financial position and can be used to gauge its liquidity and solvency.
• Income statement: An income statement is a financial statement that shows a company's revenue and expenses for a specific period of time, such as a quarter or a year. It can be used to assess a company's profitability and ability to generate income.
• Cash Flow StatementCash flow statement: A statement of cash flows is a financial statement that shows the cash inflows and outflows of a company over a specific period of time. It can be used to assess a company's ability to generate cash flow and financial stability.
• Report on changes in shareholders' equity: A statement of changes in shareholders' equity is a financial statement that shows the changes in a company's equity over a period of time. It can be used to assess a company's capital structure and how it has changed over time.

These financial statements are commonly used by investors, lenders, and analysts to evaluate a company's financial performance and make informed decisions about investing or lending to the company.

What should I look for when reviewing a company's financial statements?

When reviewing a company's financial statements, there are several key items to look for to help you assess the company's financial position and performance:

• Revenue and income: Look at a company's sales and earnings over time to understand the company's overall financial performance and whether the company is growing or shrinking.
• Gross profit margin and operating profit margin: These measures show the percentage of revenue remaining after accounting for cost of goods sold and operating expenses. They can help you understand the profitability and efficiency of the company.
• Cash flow: Look at a company's cash flow from operating, investing, and financing activities to understand its overall liquidity and cash-generating ability.
• Assets and Liabilities: View a company's balance sheet to understand its overall financial position and the relative strengths and weaknesses of its assets and liabilities.
• Debt and equity: Look at a company's debt and equity levels to understand the company's capital structure and financing practices.

It is also important to note that financial statements should be viewed in context, such as the industry in which the company operates, and compared with the historical performance of the company and its peers. This can help you identify any potential trends or warning signs. In addition, you should consult a financial advisor before making any investment decisions based on financial statements.

Epilogue

Johnson's Blog Hope this information has provided you with a basic understanding of financial report. We'd love to hear from you if you have further questions. Please comment below to share your thoughts on this topic.