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Many people read financial reports but don't understand what they are reading. Either they are too complex or they use some terminologies which are not familiar to the average reader.
Determine the time frame for the financial report. The period is usually listed at the start of the report or statement.
Take a look at the financial statements. The balance sheet shows the company's assets and liabilities.
Take a look at the balance sheet to see how it's set up. In some reports, the assets are listed on the right and the liabilities are listed on the left; in others, the assets are listed first and foremost, with the liabilities mentioned below after the assets.
Look over the assets. Cash, investments, property, and other valuable items owned by the corporation are examples of assets. The assets are arranged according to their liquidity. The most liquid assets are displayed first, such as cash. A balance sheet must always be in balance, meaning that the total value of assets must match the total value of liabilities and equity. If this isn't the case, it's frequently the first symptom of a financial statement that hasn't been properly disclosed. Examine your liabilities. Liabilities are the debts or responsibilities owed to others by the company. Rent, salary, taxes, loan payments, and money owing to other vendors or contractors are among them. The asset component is balanced by combining the liabilities and equity sections. The worth of money invested and re-invested in the business is broken out in the equity section.
Keep in mind the distinction between current and long-term liabilities. Current liabilities are obligations that must be met within a year. It will take more than a year to pay off long-term liabilities.
Take a look at the profit and loss statement. This will show you how much money the company made in a given period. Any money spent to earn that income will be represented as well.
Check the top line for "sales" or "gross revenue," which should say "sales" or "gross revenue." Before any expenses are removed, this is the amount of money the company makes by offering its products or services.
Take a look at the price of things sold. This is the negative number immediately beneath the revenue/sales amount. This figure shows the business's direct expenses in generating the revenue/sales amount. The difference between the sales/revenue amount and the cost of products sold is the gross profit, which indicates the profit made by the company before operational expenses are reduced. This amount must always be positive; if it is negative, the company is not viable.
Examine your running costs. These costs include things like salaries, advertising, salaries, and other miscellaneous charges.
Take a look at the depreciation line. This represents the cost of an asset-based on how long it can be used by the company. Check the operating profit, which is the money the company produced after operating expenses are deducted; the operating profit is the gross profit minus the total operating expenses.
Take a look at how much interest was earned and paid. If interest is paid, these are referred to as Finance costs, and if interest is received, they are referred to as Finance income. Finance costs are incurred when a firm borrows money at interest, and finance/interest income is earned when a business lends money at interest or invests in money market instruments.
Examine the amount of income tax that has been deducted.
Take a look at the income statement's last line. This indicates the profit or loss on a net basis.
Take a look at the income statement. This will reveal how much cash the business has on hand. It will also track how much money comes in and out of the organization over a given period.
First, learn about the operational activities. This section looks at how the company's money was spent to arrive at its net profit or loss.
Examine your investment activity. Any income from investments or assets sold is included in this section of the cash flow statement.
Take a look at how the money is being spent. This document documents the company's actions in repaying or acquiring debts such as bank loans.
If you have any questions, look over the supporting material. Back-up or supporting documentation, such as receipts and invoices, are frequently available to help explain transactions.