How Do You Read Financial Statements?


Quick Answer

Read a financial statement by examining a company's balance sheet, income, earnings per share and cash flow. Operating, investing and financing activities are also part of a firm's financial statements submitted to the U.S. Securities and Exchange Commission, explains its official website.

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Full Answer

One of the first charts on a company's financial statement is the balance sheet, which includes overall assets, liabilities and shareholder equity. The balance sheet gives an overall view of the company's finances, according to the SEC. Assets are things the company owns, such as property, products, machinery, trademarks and cash on hand. Liabilities delineate what a firm owes to other entities, such as debt, payroll, taxes and purchases from suppliers. Shareholder's equity is a firm's net worth, which is the amount of money remaining after a company sells all of its assets and pays all of its liabilities. The basic balance sheet formula is assets equals liabilities plus shareholder's equity. The liabilities and shareholder equity must equal the overall assets.

An income statement reports how much money a company earns over a specified time period, usually a year or portion of a year. An income statement includes the earnings per share, which denotes how much money shareholders receive if a firm sells all of its assets for a particular period. Earnings per share equal the total net income divided by the number of outstanding shares. Cash flow statements indicate the net increase or decrease of cash on hand for the reporting period, notes the SEC.

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