A Beginner’s Guide to Understanding Financial Statements
A financial statement is always more than an amalgamation of numbers. They are a clear depiction of how well your company is doing in terms of its profitability, liquidity, cash inflow and outflow, and investment potential. However, you need to study the statements in detail to be able to extract this information.
The following guide may help:
Understanding the balance sheet
A balance sheet is like a numerical snapshot that displays the total amount of assets that your company owns against how much you owe (liabilities) and what is left as net worth/book value. A balance sheet outlines both the current and long-term assets, current and long-term liabilities, existing investments, and stockholder’s equity at a given time.
For starters, analyzing a balance sheet could be a bit difficult, given how there’s too much information in a single line. However, most corporate annual reports also come with comprehensive footnotes. These notes are critical to read and explain how each figure on the table was derived. Balance sheet data is also essential to understand a company’s financial health since all the ratios and figures are derived from this data.
Understanding the income statement
The income statement is also known as the profit and loss (P&L) statement. This financial statement tells you where all of the money is coming from and where it’s going. It’s basically a comparison between your revenue and your expenses. The income statement also tells you about what’s leftover in the form of profit. You always need to use both the balance sheet and income statement hand-in-hand to analyze the total return on your investment.
A single look at the income statement can tell you how your company profited during a specific accounting period. This could be monthly, quarterly, or yearly. On the other hand, a balance sheet only tells you how well your company was doing at a certain point in time—usually an individual’s day.
The income statement also has several parts, including sales, operating expenses, gross profit, operating income, additional expenses and income, and taxes. It tells you the company’s income before interests and taxes and after the two have been subtracted. It also shows you the COGS (cost of goods sold), so you can tell how much money goes into producing the goods before they turn into sales.
Financial reporting services in Edmonton.
The key requisites for any financial statement to be viable are clarity, accuracy, conciseness, and compliance with accountancy standards. Faber LLP will help you check all the boxes when it comes to financial reporting services in Edmonton. Take a look!