Financial statements are documents that provide important information about a company’s financial health. They include the balance sheet, income statement, and cash flow statement. Understanding financial statements can help you make informed decisions about investing in a company or managing your own finances. In this article, we’ll discuss how to read financial statements.

Balance Sheet

The balance sheet is a snapshot of a company’s financial position at a specific point in time. It includes the company’s assets, liabilities, and equity. Here’s how to read a balance sheet:

Assets

Assets are things that a company owns, such as cash, inventory, and property. They are listed on the balance sheet in order of liquidity, or how quickly they can be converted to cash. Cash is listed first, followed by short-term investments, accounts receivable, inventory, and property.

Liabilities

Liabilities are debts that a company owes, such as loans and accounts payable. They are listed on the balance sheet in order of when they are due. Short-term liabilities, such as accounts payable, are listed first, followed by long-term liabilities, such as loans.

Equity

Equity is the amount of money that is left over after all the company’s liabilities are paid off. It represents the value of the company to its owners, or shareholders. It is listed on the balance sheet as owner’s equity or shareholder’s equity.

Income Statement

The income statement shows a company’s revenues and expenses over a specific period of time, such as a quarter or a year. It is also known as a profit and loss statement. Here’s how to read an income statement:

Revenue

Revenue is the money that a company earns from selling its products or services. It is listed at the top of the income statement.

Expenses

Expenses are the costs that a company incurs in order to operate its business. They include salaries, rent, and materials. They are listed on the income statement below revenue.

Net Income

Net income is the amount of money that a company earns after all its expenses are paid. It is listed at the bottom of the income statement.

Cash Flow Statement

The cash flow statement shows how much cash a company has generated and spent over a specific period of time. It includes cash inflows, such as sales and investments, and cash outflows, such as expenses and loan payments. Here’s how to read a cash flow statement:

Operating Activities

Operating activities are the day-to-day activities that a company engages in to generate revenue. They include cash inflows from sales and cash outflows from expenses.

Investing Activities

Investing activities are the activities that a company engages in to invest in its business. They include cash inflows from the sale of assets and cash outflows from the purchase of new assets.

Financing Activities

Financing activities are the activities that a company engages in to raise capital, such as issuing bonds or taking out loans. They include cash inflows from financing activities and cash outflows from debt repayment.