How to Read and Understand Financial Statements When You Dont Know What You Are Looking At: For Busi


The only factor complicating financial information is jargon, overly complex statistical analysis and complex formulas that don't convey information any better than straight talk. Don't expect financial statements to fit into a single mold. Many articles and books on financial statement analysis take a one-size-fits-all approach.

The lack of any appreciable standardization of financial reporting terminology complicates the understanding of many financial statement account entries.

How to Read & Understand Financial Statements When You Don't Know What You Are Looking at

This circumstance can be confusing for the beginning investor. There's little hope that things will change on this issue in the foreseeable future, but a good financial dictionary can help considerably. The presentation of a company's financial position, as portrayed in its financial statements, is influenced by management's estimates and judgments.

In the best of circumstances, management is scrupulously honest and candid, while the outside auditors are demanding, strict and uncompromising. Whatever the case, the imprecision that can be inherently found in the accounting process means that the prudent investor should take an inquiring and skeptical approach toward financial statement analysis. Investors need to recognize that financial statement insights are but one piece, albeit an important one, of the larger investment puzzle. The absolute numbers in financial statements are of little value for investment analysis, which must transform these numbers into meaningful relationships to judge a company's financial performance and gauge its financial health.

As noted by auditors on financial statements "the accompanying notes are an integral part of these financial statements. Prudent investors should only consider investing in companies with audited financial statements, which are a requirement for all publicly-traded companies. Much of the annual report is based on the K, but contains less information and is presented in a marketable document intended for an audience of shareholders. The K is reported directly to the U. A "clean opinion" provides you with a green light to proceed. Qualifying remarks may be benign or serious; in the case of the latter, you may not want to proceed.

Typically, the word "consolidated" appears in the title of a financial statement, as in a consolidated balance sheet. Financial Statements Are Scorecards There are millions of individual investors worldwide, and while a large percentage of these investors have chosen mutual funds as the vehicle of choice for their investing activities, many others are also investing directly in stocks.

Or maybe your workers could attract buyers by demonstrating relaxation and stress-reduction exercises. Playing these what-if games has started you thinking: This can be done using breakeven analysis. To break even have no profit or loss , your total sales revenue must exactly equal all your expenses both variable and fixed.

For a merchandiser, like a hypothetical one called The College Shop, this balance will occur when gross profit equals all other fixed costs.

See a Problem?

Jul 05, Frank rated it liked it Shelves: Investors need to recognize that financial statement insights are but one piece, albeit an important one, of the larger investment puzzle. Atlantic Publishing prides itself on producing award winning, high-quality manuals that give readers up-to-date, pertinent information, real-world examples, and case studies with expert advice. To put it another way and to switch metaphors: Good, concise overview of financial reports.

To determine the level of sales at which this will occur, you need to do the following:. Identify your variable costs. These are costs that vary, in total, as the quantity of goods sold changes but stay constant on a per-unit basis.

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State variable costs on a per-unit basis:. Determine your contribution margin per unit: Calculate your breakeven point in units: To test your calculation, you can prepare a what-if income statement for 75 units in sales which is your breakeven number of sales. The resulting statement is shown in Figure What if you want to do better than just break even? How many Stress-Buster Pack units would you need to sell?

12.2 Understanding Financial Statements

komp-masters.ru: How to Read and Understand Financial Statements When You Don't Know What You Are Looking At: For Business Owners and Investors. How to Read & Understand Financial Statements When You Don't Know What You Are Looking at has 6 ratings and 2 reviews. Frank said: Good Financial statements are fundamental to any business, large or small. They are actually report.

You can find out by building on the results of your breakeven analysis. As you can see, breakeven analysis is rather handy. Such information will help you plan for your business. Your balance sheet reports the following information:. Whereas your income statement tells you how much income you earned over some period of time , your balance sheet tells you what you have and where it came from at a specific point in time.

Most companies prepare financial statements on a twelve-month basis—that is, for a fiscal year which ends on December 31 or some other logical date, such as June 30 or September Why do fiscal years vary? A company generally picks a fiscal-year end date that coincides with the end of its peak selling period; thus a crabmeat processor might end its fiscal year in October, when the crab supply has dwindled.

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  • Understanding Financial Statements | Exploring Business.

Most companies also produce financial statements on a quarterly or monthly basis. The balance sheet is based on the accounting equation:. Thus the term balance sheet. If you look at your first balance sheet in Figure So far, so good: Once again, it balances. When you prepare your financial statements, you should complete them in a certain order:. Why must they be prepared in this order? Because financial statements are interrelated: Numbers generated on one financial statement appear on other financial statements. As you review these statements, note that in two cases, numbers from one statement appear in another statement:.

If the interlinking numbers are carried forward correctly, and if assets and liabilities are listed correctly, then the balance sheet will balance: Describe the information provided by each of these financial statements: Identify ten business questions that can be answered by using financial accounting information.

2. What Financial Statements to Use

For each question, indicate which financial statement or statements would be most helpful in answering the question, and why. Does this seem like a realistic goal? This is a derivative of Exploring Business by a publisher who has requested that they and the original author not receive attribution, which was originally released and is used under CC BY-NC-SA. For uses beyond those covered by law or the Creative Commons license, permission to reuse should be sought directly from the copyright owner.

Learning Objectives Understand the function of the income statement. Understand the function of the balance sheet. You divide your expenses into two categories: Cost of goods sold: The positive difference between sales and cost of goods sold is your gross profit or gross margin. It has provided you with four pieces of valuable information: You consider three possibilities: Breakeven Analysis Playing these what-if games has started you thinking: To determine the level of sales at which this will occur, you need to do the following: The Balance Sheet Your balance sheet reports the following information: The Accounting Equation The balance sheet is based on the accounting equation: When you prepare your financial statements, you should complete them in a certain order: As you review these statements, note that in two cases, numbers from one statement appear in another statement: Key Takeaways Accountants prepare four financial statements: