Introduction to Financial Statements
When looking at a company’s financial statement for the first time, all the numbers and terminology can be intimidating. But if you know how to analyze them and what they mean, financial statements can easily be the difference of a successful trade.
Financial statements simply disclose a company’s financial performance. Prudent investors will quantitative analyze these statements to glean information and make accurate investment decisions. First we will review the three most important financial statements – income statements, balance sheets and cash flow statements – and then reveal where they can be found.
The income statement, also known as the profit and loss statement, measures a company’s performance over a specific time frame. These statements report the revenues, expenses and profit that was generated as a result of the business’ operations for a specific period.
Balance sheets report a company’s assets, liabilities and equity at a particular point in time. A balance sheet has three parts: assets, liabilities and ownership equity. Assets are things the company owns such as cash, inventory, accounts receivable, supplies, land and buildings. Liabilities are amounts owed to creditors for a past transaction. Ownership equity is the remaining interest in assets after all liabilities are paid.
Cash flow statements record of cash inflows and outflows over a period of time. This particular statement is important because it’s very difficult for a business to manipulate its cash situation. There is much an aggressive accountant can do to manipulate earnings, but it’s difficult to fake cash in the bank.
Finding the Statements
All companies that are publicly traded on a major exchange submit periodic filings that detail their financial activities. The financial statements described above can be found in the business’ annual 10-K and quarterly 10-Q filings. These filings can be found at the following link: SEC Filings Search.
10-Ks and 10-Qs aren’t only different because of the time period they cover. While a 10-Q simply reports a company’s performance and current standing, 10-Ks cover additional information including the company’s history, number of employees, biographies of upper management, risks, future plans for growth and more. There is a lot of good information in a 10-K and its required reading for any serious investor. It’s also important to remember that the 10-K filing must be audited (evaluation by auditors for accuracy and disclosure), unlike the 10-Q.
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