
Have you ever wondered whether you are Reading Financial Statements accurately?
Unless you are a qualified financial expert, the chances of making mistakes are higher, which may lead you to poor choices. Therefore, to avoid that, let's learn how to read financial statements with our financial expert Advisor Prabhash Choudhary.
Greetings from Team Advisor Prabhash!!
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Reading financial statements is the first step to understanding the fundamental analysis of any company. It provides us with an overview of growth, profitability, liquidity, and solvency. It becomes essential when important while you are about to invest in a company.
A company’s financial statements along with board reports provide a lot of information not just about the financial performance of the company but also about the vision of the company.
We will discuss the reading of financial statements in two parts. Firstly, we will understand what the financial statements are, and secondly, we will discuss how what should we understand by reading financial statements.
Let’s begin with, what are the financial statements.
Generally, financial statements consist of -
a) Balance Sheet
b) Profit and Loss Account (Income Statement)
c) Cash Flow Statement
1. Balance Sheet:
A balance sheet is a condensed statement that shows the financial position of an entity on a specified date, usually the last day of an accounting period. Among other items of information, a balance sheet states:
(1) Assets
(2) Liabilities
(3) Owner’s Equities
Owner’s Equities = Assets – Liabilities = Paid-up share capital + Retained Earning
Further, assets are classified under subheadings such as current assets, fixed assets, and liabilities are also classified under subheadings such as current liabilities, and long terms liabilities.
A balance sheet may be called a statement of the financial health of a business enterprise.
A balance sheet is not an account but rather a document that describes the state of affairs of a company at a particular point in time.
2. Profit and loss account:
It refers to a financial statement summarizing the revenues, costs and expenses incurred during a specific period of time – may be a quarter or year. A profit and loss account provides information with respect to the ability of a company to generate revenue and profit. The profit and loss account is also known as a "statement of profit and loss", an "income statement" or an "income and expense statement".
3. Cash flow statement:
A cash flow statement, or statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income & expenses accounts, affect cash and cash equivalents.
Activities affecting cash flows include operating, investing, and financing activities.
Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet.
4. Notes to Accounts:
It refers to the detailed and additional information provided in the financial statements that have not been provided in the key reporting documents such as the balance sheet, profit & loss account, and cash flow statement.
Now after getting an understanding of what financial statements are and what documents they should incorporate, it is important to understand that financial statements should be read as a whole means reading only balance sheet and skipping profit & loss account, cash flow statements or notes to account is not ideal. We need to study all four documents as mentioned above before concluding our financial decision.
In next blog we will further discuss about What to understand from financial statements and how to read financial statements?
In case you come across any doubts, do write in the comment box or you may reach out to me via email mail@advisorprabhash.com, and I shall respond to your query at the earliest.
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