Financial Statement Analysis Basics
Financial statements are crucial in determining the health of a company. They present the results of operations as well as the financial positioning of the company. So in the unsure economic environment that we’re in these days, Financial Statements are more important than earlier. Also Financial statement analysis is very important to understand it.
There are four common statements prepared by publicly-traded companies, i.e. balance sheet, income statement, cash flow statement and statement of changes in equity.
The balance sheet is an indicator of company’s ability to pay its bills on time as well as its financial flexibility to acquire capital and its ability to distribute cash in form of dividends to the company’s owners. It is also vital since it presents the company’s assets, liabilities and shareholder’s equity. Balance sheets are instrumental in computing key indicators that reveal the company’s financial structure and how it meets its obligations. This may include current ratio, debt-equity ratio, working capital, quick ratio and debt-to-capital ratio.
The income statement is also known as Profit & Loss statement. It signifies both the earnings as well as profitability of a business. It is gauged for a specific period of time such as a month, a quarter or a year. Periodic income statements are quite crucial since they allow a comparison for the company over time and to the results of other companies over the same time period. The format used for income statement comes from a series of accounting pronouncements such as income from continuing operations, discontinued operations, net income, other comprehensive income and earnings per share income.
Cash Flow Statement
Whatever cash has been used during a certain time period is known as cash flow statement. Cash flow statement guides where company is investing and undergoing financing activities during the specified period. Broadly, there are two methods of preparing the cash flow statement, i.e. direct and indirect. On one hand, direct method shows the items that affected cash flow, such as cash collected from customer, interest received or cash paid to suppliers, etc, on the other, indirect methods adjusts net income for any revenue and expense item which did not result from a cash transaction.
Statement of changes in Equity
With a different statement of changes in stockholder’s equity, this kind of statement compiles the various components of OE on the balance sheet when the specific period started with the same items and at the end of the period. The statement focuses on the primacy of owner’s equity for investors and other readers of financial statements.