How To Read Financial Statements

The ability to read financial statements is almost as important as the ability to read words. Without the know-how to read financial statements, it would be impossible to know the value of a company. You cannot tell if it is earning or losing money. All the more it would be difficult to predict its projected performance.

Unlike common misconceptions, learning to decipher financial statements is not rocket science. Anyone with normal intelligence can attend a seminar to learn the fundamentals so that at least you can have a basic understanding. It is irresponsible and lazy to just leave everything to your accountant since it is your livelihood that may be at stake.

To give you some idea of the contents and the usefulness of financial statements, here are very simplified explanations of some of the most common terms you will encounter:

Balance Sheet. A balance sheet shows the assets of a business and how much of the assets came from liabilities and the amount coming from the owners or stockholders. The balance shows an equation or balance between the assets on one side and liabilities plus owner’s or stockholders equity on the other side. It is a description or snapshot of a business at one point in time.

Income Statement. The financial statement shows the company’s revenues and expenses at a period of time, usually a year. It is also called the profit or loss statement as the last number indicates whether there was a profit or a loss.

Assets. Assets are composed of anything of commercial value that a business owns. It can be land, equipment, inventory, rental deposits, intangible items like copyrights and many more. An asset is a resource that is expected to be able to create income for the company.

Liabilities. These are the debts of the company. There are many types of liabilities; one of the most important subdivisions of liabilities is according to when they are due. A liability that is due within one year is called a current liability. Current liabilities must be carefully monitored because they can cause cash flow problems when they become due.

Net income. In the case of the sole proprietor, this refers to the amount that remains after all taxes have been paid. However, if the company is a corporation, there will be another tax on the cash dividend even if it is already stated as a net income. This is because the corporation is treated as a separate entity from the individual persons.

Financial ratios. These ratios result from dividing an item from a financial statement with another related item in the financial statement. Knowing the value of a single item may not be enough, since it may be good or bad depending on its proportion to another item. Having one million in cash may sound good if there are little or no debts, but it is critical if there are debts that are to be paid in a few days amounting to ten million pesos. Financial ratios provide more useful indicators of financial condition than a single item by itself.

You do not have to be an accounting or finance major to learn enough about financial statements to gain extremely useful knowledge. The basic concepts are very easy to grasp.

To know more about this topic, BusinessCoach, Inc., a leading business seminar provider, conducts a seminar entitled “Financial Statement Analysis.” Contact (02) 727-5628, (02) 727-8860, (0915) 205-0133 or visit www.businesscoachphil.com for details.

Click here to view details of the seminar: Financial Statement Analysis »

*Originally published by the Manila Bulletin. C-6, Sunday, January 20, 2013. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.