How To Read A Financial Report

  • Oct 04, 2018 AEST
  • Team Kalkine
How To Read A Financial Report

The company’s financial performance is usually judged by its Financial Reports. Financial report provides details of financial activities and financial position of the company over a specific period of time. Most businesses and organizations provide their financial reports in a structured format to their Boards of Directors, shareholders and investors on a monthly, quarterly or annual basis. Most of the financial reports consist of balance sheet, Income Statement and Cash Flow Statement

  1. Identify the time period 

To read a financial report, first one must identify the time period which is covered by the Financial report. The financial report could be on quarterly, monthly, semiannually and Annual basis. Usually the time period and the year-end are mentioned at the top of balance sheet, Income Statement and Cash Flow.

     2. Understand balance Sheet

Balance Sheet of the company helps understand the financial position of the company as it provides the summary of all the accounts in a company. The Balance sheet is divided into two parts -Assets and Liabilities.

Assets includes items which are owned by the company like cash, investments, plant and Machinery. It sometimes also includes intangible items like Goodwill.

Liabilities are the obligations and debt that the company have to pay like creditors, taxes, Loan, current liabilities, Long term Liabilities, Equity etc. Long Term Liabilities are the ones which are going to be paid after one year whereas the current liabilities are the one which are paid within a year time. Items like Equity (owner’s money) is also included in liability side as the company is considered separated from its owners and it is company’s obligation to pay their owners back.   

  1. Understanding Income Statement

Income statement provides the list of all the incomes and expenses that have been incurred by the company over a period. It shows the total money earned or total incurred loss of the company which is calculated by subtracting all expenses from the income.

The income generally contains items like sales, gross revenue etc., which provide the total money which is made by the company through its operating and non-operating activities.

The expenses generally contain the items like operating expenses, non-operating expenses, general expenses, depreciation etc. Income statement also includes items like Tax paid, Interest paid etc. which are subtracted from the income to calculate the Net Profit. The last line of income statement gives Net Profit or Net Loss of the company.

        4. Understanding Cash Flow Statement

Cash Flow Statement provides the details regarding the inflow of cash from various sources and outflow of cash during a specified time. It tells how much cash is available with company. The cash flow statement is trifurcated into different activities, which include Operating activities, Investing Activities and Financing Activities.

Operating Activities as the name suggests, include outflow and inflow of cash in those activities which are directly related to the day to day operations of the company like payments to supplier, depreciation, changes in current assets and liabilities etc.

Investing activities include items like purchase and sale of Assets, payments of mergers and acquisition etc. Proceeds from the sale of asset will be recorded as inflow of cash and payments related to purchase of assets will be recorded as outflow of cash.

Financing Activities provides an overview of cash which is used in business financing. It includes items like repayment of debt, issuance from borrowings, loan repayment, interest on loan paid, dividends paid etc.

After adding the balances of all three activities, we will get the cash balance at the end of the period.

  1. Read every note, explanation and Supplementary Information provided with the Financials

Usually company provides notes and explanations regarding the items which are mentioned in the financial statement. To understand the financials more clearly and avoid any misunderstanding one must go through all the notes and explanation.

  1. Read overview of Financials

Accounting professionals usually write an overview of the financial in a paragraph which could provide more clear understanding about the financial Report.

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