There are 3 main financial statements which form the starting place for analyzin
ID: 412713 • Letter: T
Question
There are 3 main financial statements which form the starting place for analyzing a business:
Balance Sheet shows how much company owns (assets) & how much it owes (liabilities). The Balance Sheet represents the firm’s financial condition at one moment in time.
Assets = Liabilities + Owner’s Equity
Income Statement shows profitability of a company & where cost savings might be made. The Income Statement shows the firm’s profit (or loss) over a period of time (usually one full year).
Revenue – COGS = Gross Profit – Operating Expenses = Net Profit – Tax = NIAT [i.e., Net Income After Tax... aka "The Bottom Line"]
Cash Flow shows money flowing in and out of a company, usually on a monthly basis, which can alert you to a cash/credit crunch where there might be a shortfall. The Statement of Cash Flow reports cash receipts [revenue] & cash disbursements [expenses] over time (usually one full year, but broken down month to month).
monthly figures entered into a spreadsheet, usually for a one year period or longer
State which of these 3 financials you think is the most important to consider first when evaluating a company, and why. What additional information do you think would be helpful in evaluating the financial situation of a firm?
Explanation / Answer
I think Balance Sheet is the statement that is the most important to consider first when evaluating a Company because it gives a gist of all types of significant activities that the Company is concerned with. For example, the Bottom line obtained from the Revenue statement is transferred to the Reserves or to the Stockholder’s equity, which also gets reflected into the Balance sheet. Similarly, the net change in cash forms the Cash at the beginning of the Balance sheet. Hence, it helps summarizing all types of financial activities in terms of spending or earning, thereby helping to evaluate the financial standing of the Company in the industry. A critical examination of Balance sheet statement would also help to comprehend whether the Company is undergoing a critical time or is financially sound.
However, in terms of the additional information that I think would be helpful in evaluating the financial situation of a firm apart from the above three financial statements, would be the determination of various Financial ratios such as Liquidity ratios, Debt ratios, Activity ratios, Profitability rations, etc. These ratios add more meaning to the statements and also helps in forecasting the financial activities in a significant way. It could be used by various parties such as financial analysts, stock holders of the Company, Company’s management, etc. in order to understand the strengths and weaknesses of the Company and the financial state of the Company overall in any given industry.
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