Interpretation of Financial Statements – Size of Your Pocket

Financial statement is where clever people decide to toss a coin on you to join or to keep away. If you are an Investor or an Entrepreneur, both ways financial statement is of much importance. It is a standard practice for a business to present financial statement that adheres to accounting principles to maintain continuity of information and presentation across borders. It explains the credibility/ durable competitive advantage of a company whether it is a gold mine or a crap.

Financial statement for business has multiple flavors here follows:

The income statement

Income statement is one of the three financial statements which is also known as ‘statement of revenue and expense’. It tells us how much the company did earn during the period of time and how much it incurred as expenses. The company’s accountants generally generate the income statement for its shareholders to see for once in three months and thus four times a year. Studying the income statement one can determine company’s margin, your earning per share (EPS), and more importantly the consistency and the direction of its earnings. This will lead you to smell a company.

Balance sheet

The second flavor of financial statement, balance sheet provides detailed information about a company’s Assets, Liabilities, and shareholder’s Equity. Assets are things that a company owns that have value. Liabilities are amounts of money that a company owes to others. Shareholders’ equity is also called capital or net worth as it is the money that would be left if a company sold all of its assets and paid off all of its liabilities. In short it says about owning and owing of a company.

Traditionally companies generate a balance sheet for shareholders to see at the end of each three month period of time or at the end of accounting or fiscal year. Whenever this magic pot is open, the entries will talk of the amount that company owns and the long term debt profile it hold. Here come people to know loud on the credibility and durable competitive advantage of the company.

Cash Flow Statement

The third member of financial statement, the cash flow statement, explains how much money you put in and make out of a company in a given period of time. Generally speaking, if a company brings more than what they spend, it is considered to be a good company. But the brainy people look through to find the capital improvements and hold for a long term understanding. Cash flow statement also tracks bonds, sales and repurchases. It is usually issued along with its other financial statements.

In short, same accounting data is used in preparing all three statements, but each takes a company’s pulse in a different area. Each has its own interpretation to explain the confidence of a company which we will discuss in greater details in a series of articles later.


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