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How do you interpret company financial reports?

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Quick Answer

There are four types of financial reports; balance sheets, cash flow statements, income statements and statements of shareholders' equity, and each type is interpreted differently, explains the Securities and Exchange Commission, or SEC. Each type has a specific function; for instance, balance sheets indicate the assets and debts of a company over a certain period.

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Full Answer

Balance sheets provide comprehensive data about corporate assets, debts and shareholders equity, explains the SEC. Assets refer to equipment, products and resources owned by a company that can be used to generate money. Debts, or liabilities, refer to a company's obligations and include loans and taxes. Shareholders' equity indicates the net worth of a firm and can be obtained by deducting liabilities from assets. To be accurate, entries on the asset side of a balance sheet must give a result equal to the total sum of liabilities and shareholders' equity.

An income statement documents company revenue over a certain period of time, explains the SEC. Additionally, income statements show costs associated with generating that revenue. These documents typically report their contents in terms of earnings per share.

Cash flow statements show the ebb and flow of cash in a company, explains the SEC. These documents are organized in three categories. The first part, operating activities, indicates the amount of cash used during in the course of operations. The second part, investing activities, shows cash flow generated from investments, while the last part, financing activities, indicates the amount of cash derived from financing operations such as selling stock.

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