Updated at 26/11/2022 - 09:23 pm
Knowing how to read and understand the numbers in a company's financial statements is an essential skill for business managers. The variety of financial statements requires that we first familiarize ourselves with some of the features of financial statements before focusing on specific metrics.
In this article, we'll show you what financial statements have to offer and how to use them to your benefit.
Understand what Financial Statements are #
Financial statement is defined as the economic and financial information system of an accounting unit (enterprise, organization), presented according to the form specified in accounting standards and accounting regime.
The set of financial statements includes 4 reports, which are:
- Income Statement (Also known as Income Statement or Profit and Loss Statement)
- Accounting balance sheet,
- Statements of cash flows
- Notes to financial statements
1. Report on business results #
The income statement reflects the business situation and results of the enterprise.
Business results of the enterprise are shown through 3 groups of activities from which profit or loss is generated, they include:
- Results from core business activities = Revenue from sales of goods and services rendered – Sales deductions (including discounts, rebates, sales returns) – Cost of goods sold – Expenses sales – Business administration expenses
- Outcome from financial activities = Revenue from financial activities – Financial expenses
- Results from other activities of the business = Other income – Other expenses
Corporate income tax is calculated on the profit from the income statement.
2. Balance sheet #
Balance sheet is a consolidated financial statement, which generally reflects the total value of existing assets and the source of those assets of an enterprise at a certain point in time.
The figures on the balance sheet show the entire value of the enterprise's existing assets according to the structure of assets and the structure of capital sources that form those assets.
Based on the balance sheet, it is possible to comment and generalize the financial position of the enterprise.
3. Cash Flow Statement #
A statement of cash flows is a report that tracks the cash inflows and outflows related to three types of business activities, namely Operating Activities, Investing Activities and Financing Activities.
i. Cash flow from operating activities
Cash flow from business activities reflects cash inflows and outflows related to production and business activities during the period, including:
- Proceeds from sales, provision of services and other revenues
- Payments to suppliers of goods and services
- Payments for employees
- Interest paid
- CIT paid
- Other proceeds from business activities (Revenues are compensated, fined, bonus, support...; Money collected from deposit, deposit; Money recovered from deposit, deposit)
ii. Cash flow from investing activities
Cash flows from investing activities represent the cash inflows and outflows of the following activities:
- Cash for purchase and construction of fixed assets / Proceeds from liquidation and sale of fixed assets
- Money spent on loans to other entities / Cash recovered from loans to other entities
- Money spent on capital contribution to another entity / Cash back from capital investment in another entity
- Collect loan interest, dividends and distributed profits
iii. Cash flow from financial activities
Cash flows from financing activities represent the inflows and outflows of the following financial activities:
- Receive contributed capital, return capital, issue shares, buy back shares
- Money collected from borrowing and repaying loans.
- Divide profits, pay dividends
Thus, through the Cash Flow Statement, the board of directors tracks the cash inflows and outflows related to three types of business activities, namely Operating, Investing and Financing. that makes accurate financial management decisions.
4. Notes to Financial Statements #
Notes to the financial statements are reports used to describe in a narrative or detailed analysis the information and data presented in the Balance Sheet, Income Statement, Income Statement. cash flow.
Thus, the Board of Directors can find out the necessary details through the Notes to the Financial Statements.
Refer: Financial reporting service
Matters needing attention when reading Financial Statements #
Financial Information: Art, Not Science #
The presentation of the financial position of an enterprise, as presented in the financial statements, is influenced by estimate and judge of the Board of Directors, it is not merely adding and subtracting from absolute numbers.
Assessing your financial situation: More than just numbers #
The absolute numbers in financial statements should be considered in relation to industry, company size, and stage of development when assessing the financial health of a business. The resulting indicators must be viewed for sufficient time to identify the trend.
Financial statements do not show some non-financial information #
Non-financial information such as information on the state of the economy, industry, level of competition, market forces, technological changes, management quality and workforce is not directly reflected in the report corporate finance.