For any organization, financial statements are of extreme importance. Through these statements, you can easily understand the company's economic condition as they help reveal its profitability and solvency. It is not something that only an accountant should learn; understanding the financial statements and analyzing them is vital for anyone looking to make an investment partnership to make a well-informed decision.
The purpose of this blog is elementary - to teach readers how to read financial statements. We will break down the concept of financial statements for readers of all backgrounds and show readers how they can be analyzed. You will understand every aspect of the statements, from the balance sheet to the cash flow statement. Let's get into the details.
Let's break down the financial statement into small bits for your understanding.
The balance sheet mentions a company's financial position, assets, and liabilities. Its purpose is to provide an overview of the company's assets and liabilities and to determine what debt it needs to pay.
Key components of the balance sheet include-
Assets: The resources or something of value that the company owns and controls, which provides it with future benefits, are known as assets. Assets are further classified into two forms: Current assets, which can be converted into cash or used by a company within a year, and Non-current assets, which are meant to provide benefits after a year.
Liabilities: Liabilities are obligations or things that the company owes to other people or organizations. They can be further classified into short-term liabilities, which must be paid off within a year, and long-term liabilities, which are due after a year.
Equity: This refers to the amount of capital owned by the company owner. It is calculated by the difference between the assets and liabilities mentioned in the balance sheet.
It is referred to as a profit and loss statement. The purpose of the income statement is to record revenues and expenses over a fixed period, whether quarterly or yearly.
The main elements of the income statement are-
The purpose of the cash flow statement is to provide details on the cash coming in and going out during a specific period. It shows how money is generated and used by the business.
Some of the elements of the cash flow statement include-
Operating Activities - This includes details regarding transactions related to business operations, such as sales receipts and salaries paid to employees.
Investing Activities - The cash flow from investing activities involves transactions related to acquisitions and disposals of long-term assets like property.
Financing Activities- Transactions such as repurchasing stock, repaying debt, etc.
Cash flow, which shows positive operating activities, suggests healthy cash generation from the core of the business.
Negative cash flow indicates a thorough examination of the reasons behind the cash movements.
These are considered financial tools, generally used by investors, managers, and accountants to assess a company's financial condition. These ratios can help you learn about a company's efficiency and financial position.
Some of the most important ratios are-
Liquidity ratio: It has two parts: Current Ratio and Quick Ratio. In the current Ratio, a company's ability to pay short-term obligations is tested. In contrast, in the quick Ratio, if the company is on the higher side, it can pay off the obligations without relying on any liquidation.
Profitability ratio: This Ratio has two elements-
Return on Equity measures a company's profitability relative to shareholders' Equity, and Gross Margin refers to revenue that exceeds the cost of goods sold (COGS).
Efficiency ratio: Asset turnover measures how efficiently a company utilizes its assets to generate revenue. Inventory turnover is calculated by dividing COGS by the average inventory.
Leverage ratio indicates the proportion of debt financing relative to equity financing.
Some of the most common mistakes in financial analysis are-
These mistakes can be avoided by
NIWS (India's best stock market institute) can help you understand accounting and financial analysis. It is one of the stock market institute in Jaipur, Indore, and Delhi, offering a comprehensive list of courses from NSE, BSE, SEBI, and NISM modules.
Professional and trained experts at NIWS have 10+ years of stock market experience and offer quality training and a hands-on approach with practical knowledge to ensure students can outperform in the realistic market.
Knowing the pitfalls and ways to avoid them while doing financial analysis can help beginners conduct a better, more accurate, and more efficient report. A basic understanding of cash flow statements, P& L Statements, and financial metrics can help enhance the effectiveness of their evaluations.
Learning is a never-ending process, and with new rules and regulations every few years, staying updated on these trends will help you read and analyze financial statements.
If you wish to learn more about financial statements and how they can be prepared, connect with NIWS. Their vast range of courses will guide you in the right direction.
Start with a demonstration class.