Hello business activists…
Understanding financial statement is like cooking in the kitchen. When you have no idea what to do, you will end up burning the kitchen. That is why if you want to read this kind of statement, you need to know everything about it first. Down below, there will be detailed information that you should understand about financial statement. It will show you exactly how to read them and how to get to know them easily.
Understanding Financial Statement for Beginners
Before being able to read, let alone analyze a financial statement from a company, you should understand that there are so many things that you need to know about the statement. The explanations down below is going to show you the definition of the statement to the method to conclude everything written in the statement. That way, understanding financial statement won’t be so hard anymore. Here they are for you to read.
1. What is Financial Statement?
If you have watched the movie “Jerry Maguire”, you must be familiar with Cuba Gooding Jr’s “Show me the money” jargon. Yes, this is exactly what a financial statement is. This is a statement issued by a company or organization to show investors or assessors their money. If someone outside the company wants to know exactly the financial situation of the company, this report is the one to give.
2. Why is Financial Statement Important?
A financial statement is incredibly important because it will determine a lot of things, including the company’s investments and performance in the market. Usually, the statement or report is given to potential investors or buyers. By understanding financial statement given to them, they can determine whether they want to invest in the company or not. Of course, this will bring a massive change to the company’s further financial situation.
3. Parts of Financial Statement
There are basically four parts of a financial statement and you will have to read all of them to completely understanding financial statement. The first part is called balance sheet. It shows you what the company owns currently. Then, there will be income statements. This is the part where the company’s source of money is explained. Next, there is cash flow statement to show the exchange of money between the company and the investors or the outside. Lastly, there is statement of shareholder’s equity. This part is to show you the company’s value in the investors’ point of view.
4. Understanding Balance Sheets
Basically, balance sheet is the part of the report when the company is presenting the assets they own and the debt they owe. It will show the reader how balanced the money situation in the company is. The rate of assets and debts should be balanced, with the debt to never overpower the assets.
5. Understanding Income Statements
Income statement is a very important part of the report, too. It shows the reader of the report about the amount of money the company has made over a particular period of time. In this part, the readers will also figure out the amount of money the company has spent in the same period of time.
6. Understanding Cash Flow Statements
In understanding financial statement, you need to understand cash flow in there, too. The statement about cash flow is going to show you the money exchange rate between the company and its partners outside. The statement is eventually going to show everyone whether the company makes profit or not. It also tells whether the company is capable in generating cash or not.
7. Understanding Statements of Shareholders’ Equity
This part is essential for investors. This part is going to show everyone about any changes happened on the interest of the company’s investments, particularly those by the shareholders. Profit is what important in an investment and it won’t happen when the previous investors already labeled the company as unprofitable. That is why the statement is important in understanding financial statement.
8. Reading the Footnotes
Sometimes people take footnotes for granted. The little parts on the bottom of the page are skipped most of the time. However, this is wrong. In understanding financial statement, you will have to read everything, including the footnotes. In the footnotes, there will be statements of income taxes and accounting policies.
These two parts are important to read because income taxes part informs you about the current situation of the taxes that must be paid by the company, including the taxes by the federal government, state government and many more. As for the accounting policies, this part will inform you the values adopted by the company to perform their entire policies and practices regarding to accounting and finance.
9. Reading the MD&A
In understanding financial statement when you are the investor, you need to go straight to the MD&A part. MD&A stands for “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. This is like a narrative of the financial situation of the company. The company is going to tell exactly how the financial situation is going on there. This is a great part of the report that has to be read when you are assessor or potential investor there.
10. Concluding the Financial Statement
To conclude everything and eventually understanding financial statement, you have read in the company, you will have to take a look at several important parts: 1) the cash flow, 2) the signs of financial distress. These two parts of the report will show you exactly the real condition of the company’s finance.
If the cash flow is considered “normal’ and there are no signs of financial distress to find frequently, then the financial situation of the company can be classified as a good one. On the contrary, if everything seems like a mess with debts and unpaid taxes everywhere, it should be a clear sign that the company’s financial situation is not good.
Those are some of the most important things you need to know about financial statement. It is including the methods to read them easily. Make sure before you make a financial statement or try to read them, you understand exactly what to do. The explanations up above will surely help you in understanding financial statement, so you can read them easily all the time and eventually capable in analyzing or presenting a company’s financial condition.