4 Financial Statement Analysis - 4 Financial Statement Analysis Explained

Key Concepts

• Income Statement
• Balance Sheet
• Cash Flow Statement
• Statement of Changes in Equity

Income Statement

The Income Statement, also known as the Profit and Loss Statement, reports a company's financial performance over a specific period. It details the revenues, expenses, and net income or loss. This statement helps investors and analysts understand the company's profitability and operational efficiency.

Example: A retail company's Income Statement might show total sales of $1 million, cost of goods sold of $600,000, operating expenses of $200,000, and a net income of $200,000. This indicates that after covering all costs, the company earned a profit of $200,000.

Balance Sheet

The Balance Sheet provides a snapshot of a company's financial position at a specific point in time. It lists the company's assets, liabilities, and shareholders' equity. The fundamental accounting equation, Assets = Liabilities + Equity, must always hold true in this statement.

Example: A manufacturing company's Balance Sheet might show total assets of $5 million, including cash, inventory, and equipment. It might also show total liabilities of $2 million, including loans and accounts payable, and shareholders' equity of $3 million. This indicates that the company's assets are financed by a combination of debt and equity.

Cash Flow Statement

The Cash Flow Statement reports the cash inflows and outflows from a company's operating, investing, and financing activities over a specific period. It provides insights into the company's liquidity and how cash is being generated and used.

Example: A software company's Cash Flow Statement might show operating activities generating $500,000 in cash, investing activities using $200,000 for purchasing new equipment, and financing activities providing $100,000 from issuing new shares. This indicates that the company's core operations are generating cash, but it is also investing in growth and raising capital.

Statement of Changes in Equity

The Statement of Changes in Equity, also known as the Statement of Retained Earnings, details the changes in shareholders' equity over a specific period. It shows how net income, dividends, and other transactions affect the equity accounts.

Example: A real estate company's Statement of Changes in Equity might show beginning equity of $1 million, net income of $200,000, dividends paid of $50,000, and ending equity of $1.15 million. This indicates that the company retained $150,000 of its net income, increasing shareholders' equity.