Investors need to understand financial statements to understand investments. Yet some investors don’t have a basic grasp. In this and the following articles, we cover major financial statements.
There are three major financial statements: the Balance Sheet, the Income Statement (also known as the Profit/Loss Statement), and the Statement of Cash Flows.
The Balance Sheet
This statement reports values of company’s accounts as of specified date. Publicly listed companies publish their reports quarterly, so the Balance Sheet reflects holdings as of the date the report was made. For example, for the first quarter of the year, the date of the Balance Sheet will be March 31st. (Although, the report is made available to the public several days or few weeks after the closing of the period.) There are also annual reports that end on December 31st.
The Balance Sheet has three major sections. First, there are Assets. This is what the company owns. Then, there are Liabilities, what the company owes. Finally, there’s a Shareholder’s Equity section, which equals Assets minus Liabilities. This represents net worth.
The Income Statement (aka Profit/Loss or P/L Statement)
This statement shows the results of company’s activities over a period of time such as a month, a quarter or a year. Basically, it lists company’s revenues (sales) from which costs (expenses) are subtracted to derive gross profit. Finally, taxes (if any) are subtracted to arrive at net profit.
Note that this statement may as well show loss instead of a profit, thus its alternative name is the Profit/Loss Statement.
The Statement of Cash Flows
This statement is published together with the other two statements. It shows the cash company received and spent during a given period. What many investors are surprised about is that revenues don’t automatically equal corresponding cash flows as transaction and payment dates can be, and often are, different. Therefore, it is important to monitor company’s cash position to ensure it has enough money to continue to operate.
The statement of cash flows is broken into three sections representing cash flows from operating, investing, and financing activities.
Serious investors need to understand financial statements very well
The three major financial statements are the Balance Sheet, the Income Statement, and the Statement of Cash Flows. In this section, we dig deeper into them.