How to read the three main parts of a financial statement

by Sally Kilbridge May 1, 2017

Knowing how to read a financial report is the first step in investigating the health of a business. (“Magnifying Glass” by John Lester via Flickr, CC BY 2.0)

The first stop for a journalist examining the financial health of a public company is its financial statement, which can easily be found in its annual report. The three main components of a financial statement are the balance sheet (aka the statement of financial position), the income statement (aka the statement of operations or the statement of comprehensive income), and the statement of cash flows. .

The balance sheet

It is a summary of the financial balances of a company. It measures business assets (such as cash, inventory, equipment), liabilities (such as salaries, short-term debt, taxes owed), and equity or equity (the amount that ‘they invested in the business) at a specific point in time, usually the end of the fiscal year. The balance sheet equation always balances: assets equal liabilities plus equity. A = L + SE. Think of it as a snapshot of a moment in time. It doesn’t tell you much about how this moment compares to other times.

The income statement

The income statement, also known as the income statement (P&L), is a financial statement that accounts for the income generation and general health of a business over a period of time. Unlike the balance sheet, the income statement covers a period of time. The income statement gives an overview of income, expenses, net income and earnings per share. It typically provides two to three years of data for comparison. You can use income statements to compare similar businesses in the same industry or to compare industries.

Statement of cash flows

It measures the flow of money in and out of a business. It merges the balance sheet and the income statement. Keep in mind that the income statement does not have to occur in the same accounting period as the cash flow statement. For example, Boeing may receive money from a customer this year (the current accounting period) as a deposit to build an aircraft, then build and deliver the aircraft next year (that’s when that he creates wealth for himself). The customer can then pay Boeing the purchase price in cash, less the initial deposit, and will likely do so over several years. The wealth flows on Boeing’s income statement will differ from the cash flows in its statement of cash flows for the current year and future years. (Originally reported by Steven Orpurt)

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