FMP
Oct 28, 2023 12:22 PM - Parth Sanghvi
Image credit: Scott Graham
Financial statements are a set of documents that provide a summary of a company's financial performance and position. They are essential for investors, creditors, and other stakeholders to assess a company's financial health.
There are three main types of financial statements:
The balance sheet equation is:
Assets = Liabilities + Equity
This equation means that everything a company owns (its assets) is financed by either debt (its liabilities) or equity (its ownership).
Assets are anything a company owns that has value. Assets can be divided into two categories:
Liabilities are debts that a company owes. Liabilities can also be divided into two categories:
Equity is the difference between a company's assets and its liabilities. Equity represents the ownership interest of the company's shareholders.
The income statement equation is:
Revenue - Expenses = Net Income
This equation means that a company's net income (profit) is equal to its revenue minus its expenses.
Revenue is the money that a company generates from its core business activities. Examples of revenue include sales of goods and services, interest income, and dividend income.
Expenses are the costs that a company incurs to generate revenue. Examples of expenses include cost of goods sold, operating expenses, and interest expense.
Net income is a company's profit after all expenses have been paid. Net income is also known as the bottom line.
The cash flow statement shows how much cash a company has generated and used over a period of time. The cash flow statement is divided into three sections:
Once you have learned how to read financial statements, you can start to analyze them to assess a company's financial health. There are many different ways to analyze financial statements, but some common ratios include:
By analyzing financial statements and comparing ratios to industry benchmarks, you can get a good understanding of a company's financial health and performance.
Financial statements are an essential tool for investors, creditors, and other stakeholders to assess a company's financial health. By learning how to read and analyze financial statements,
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