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Dissecting a financial statement

May 1, 2017

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Knowing how to read a financial report is the first step in reporting on a business's health. ("Magnifying Glass" by John Lester via Flickr, CC BY 2.0)
Knowing how to read a financial report is the first step in reporting on a business's health. ("Magnifying Glass" by John Lester via Flickr, CC BY 2.0)

The first stop for a reporter looking at a public company’s financial health is its financial statement, easily 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 Statement of Comprehensive Income) and the Statement of Cash Flow.

The balance sheet

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

The income statement

The income statement, also called the profit-and-loss statement (P&L), is a financial statement that reports a company’s revenue generation and general health over a period of time. Unlike the balance sheet, the income statement covers a range of time. The income statement provides an overview of revenues, expenses, net income and earnings per share. It usually provides two to three years of data for comparison. You can use income statements to compare similar firms in the same industry or to compare industries.

The statement of cash flow

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

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