How to Read a Financial Statement

by Business Dictionary

A company’s financial statement is used to show a company’s performance over a certain period of time, generally every fiscal quarter. The financial statement really consists of three different statements: balance sheets, cash flow statements and income statements.
By being able to read a financial statement, you can determine where a company has made or lost money, where the money went and how the company stands financially. The financial statement gives shareholders an accounting of how their investment is performing.

Components of a Financial Statement

Balance Sheets

Represent the assets, liabilities and the net worth or shareholder equity of the company. Assets make up all the property the company owns, including bank accounts, real estate, machinery etc. An asset can also be intangible such as a trademark or patent.
Liabilities consist of the money the company owes others. This can include leases on real estate, loans, accounts payable to suppliers of material, tax liabilities or obligations to deliver product.  Liabilities also include employee payrolls and money borrowed from banks.

Shareholder equity represents the company’s net worth if it were liquidated and what each shareholder would receive after paying the creditors of the company.

Cash Flow Statements

Reports on the inflow and outflow of the company’s money. The cash flow statement is divided into financing activities, operating activities and investment activities. In combination, these three parts show the change in capital position the company had over a period of time.

Income Statements

Show how much revenue the company took in over a specified time period and how much money was spent to get that revenue. The income statement shows the company’s net earnings or losses on the bottom line and begins with all the cash the company took in at the top, and goes through all the expenses it took to make that money with the net figure on the bottom.
Knowing how to read a financial statement gives an investor or analyst a clear picture of the financial position of a business. Nevertheless, past performance does not generally guarantee future results; keep this in mind before investing in any company.