Understanding and interpreting financial statements (2024)

FAQs

How do you interpret financial statements? ›

Financial statements are written records that illustrates the business activities and the financial performance of a company. In most cases they are audited to ensure accuracy for tax, financing, or investing purposes.

They provide users with information about the allocation and use of funds, the source and type of revenues and to what extent revenues were sufficient to meet expenditures. They also provide a snapshot of how much money was spent and for what purposes, and how cash needs were met.

Understanding the basics of financial statements provides investors with valuable information about a company's financial health. Investors can use key reports, such as a balance sheet, cash flow statement, and income statement, to evaluate a company's performance, helping to make more informed investment decisions.

When a company is suffering a short term problem, Buffett looks at cash or marketable securities to see whether it has the financial strength to ride it out. Important: Lots of cash and marketable securities + little debt = good chance that the business will sail on through tough times.

The major elements of the financial statements (i.e., assets, liabilities, fund balance/net assets, revenues, expenditures, and expenses) are discussed below, including the proper accounting treatments and disclosure requirements.

While the P&L statement gives us information about the company's profitability, the balance sheet gives us information about the assets, liabilities, and shareholders equity. The P&L statement, as you understood, discusses the profitability for the financial year under consideration.

The balance sheet is broken into two main areas. Assets are on the top or left, and below them or to the right are the company's liabilities and shareholders' equity. A balance sheet is also always in balance, where the value of the assets equals the combined value of the liabilities and shareholders' equity.

The income statement illustrates the profitability of a company under accrual accounting rules. The balance sheet shows a company's assets, liabilities, and shareholders' equity at a particular point in time. The cash flow statement shows cash movements from operating, investing, and financing activities.

A financial statement is like the GPS of an organization- one that provides you with a picture of its financial performance The documents can reveal a company's true health and trajectory. They provide a comprehensive snapshot of an enterprise's financial activities and position.

How to read and interpret a balance sheet? ›

A balance sheet reflects the company's position by showing what the company owes and what it owns. You can learn this by looking at the different accounts and their values under assets and liabilities. You can also see that the assets and liabilities are further classified into smaller categories of accounts.