How to Read a Financial Statement

Daniel Penzing
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How to Analyze an Income Statement

(or Statement of Operations)

An income statement, also referred to as a statement of operations, provides a snapshot of the business by reporting revenues and expenses, giving an overview of how well the business is doing and distinguishing whether it is making a profit or operating at a loss. It is required whenever a business files for incorporation.

Based on this information, you can gain an understanding of how well the business has performed on a month-to-month basis and how efficiently the business is using its resources (the cost of doing business). With this financial information, you can see whether the business has improved in the last year or if it is steadily deteriorating.

Key items that will help you make a positive assessment of the business’s health include the:

„ Cash flow statement: Shows how much cash the business is generating in relation to its expenses.

„ Cash and cash equivalents: Shows how much cash the business has on hand or can easily access.

„ Operating cycle: Gives a snapshot of the length of time it takes from the point a customer places their order to the point where the business gets paid for the goods or services provided.

„ Inventory turnover: Indicates the number of times that inventory turns over in a given period.

How to Read a Balance Sheet

You probably already know that a balance sheet is one of the financial statements that your company makes, but did you know that it’s the second most important financial statement? That’s right, the balance sheet is more important than the income statement and the statement of cash flow … that’s because it provides you with a snapshot of what the business owns, owes, and values, and how those numbers have changed in the last period.

A balance sheet isn’t really a sheet… it’s a statement. It summarizes the financial position of a company on a specific date. The point of the balance sheet is to show a company’s assets on the left side of the page and the liabilities and/or total equity on the right side of the page. Prominent financial statements like the balance sheet include balance sheet items like net change in cash, net current assets, assets and liabilities, and so forth.