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Business Education
Understanding Annual Reports

 

 

 

 

 

 

 

How to Read a Financial Report.

The purpose of this guide is to give the reader the most important elements in reading a corporate financial statements. This guide is particularily useful for non-financial managers that need a clear understanding of what is included inside financial statements and the ability to communicate this information to other colleagues. After all, accounting is the language of business.

Corporate financial statements have three basic types: Income Statement (or Profit and Loss statement), Balance Sheet, and Cash Flow Statement. The income statement tells you how a company performed over a period of time which is usually one year. The balance sheet statement tells you what the company owns (assets) and owes ( liabilities ) at a specific point in time. The cash flow statement explains to the reader the actual inflows and outflows of cash from the business firm.

Balance Sheets.

The balance sheet represents the financial position of the company at a particular day. This is normally at the end of a 12 month period. Some companies financial periods will end on December 31st of each year which is called the end of the calendar year. A company's financial period that ends on another month is referred to as a fiscal year period. The balance sheet is divided into two parts: assets and liabilities and stockholders equity. Both sides must always be in balance. The assets column lists all goods and property that the business firm owns. Liabilities lists all debts by the company.

The following sections gives you a comprehensive explanation of each element found in a balance sheet.

Current Assets

Current assets includes cash and other assets which will normally be turned into cash at some point during the year. Cash will sometimes include marketable securities in a balance sheet. Marketable secutrities are generally highly liquid and safe short-term investments that a company holds to park its idle cash not earmarked for any business expenses.

The Net Working Capital figure simply deducts the current assets from the current liabilities on the balance sheet. USBR calculates the Net Working capital as follows:

1 Cash $ 30,000

Marketable Securities

Marketable securities represent temporary investments of excess or idle cash. This cash is usually invested in money market securities such as commercial paper or treasury bills. These are normally highly liquid and safe investments since many are backed by the federal government and very large companies with high credit standing. Marketable securities have very little if any price fluncuation and are normally shown on the balance sheet at cost.

2 Marketable Securities - cost $40,000 ( Market Value $42,000 )

Accounts Receivable

Accounts receivable represents amounts of sales not collected from customers. Goods are normally shipped to customers prior to payment which creates receivables. Most businesses require customers to pay within 30, 60, or 90 days. Some customers may fail to pay their bills due to a wide variety of circumstances Thus, accounts receivable must represent a realistic projection of customers who will not pay. The accounts receivable are figured after a provision for bad debts This is a bookeeping entry which estimates the amount of receivables that will not be collected.

3 Accounts Receivable - ( Less allowance for doubtful accounts $2,875 ) $225,000

 

Current Liabilities.

Current liabilities generally includes all debts that fall are due in the year.Current assets is a companion to current liabilities because current assets are the source from which payments are made on current debts.

Accounts Payable

Accounts payable represents the amount that a company owes to its regular business creditors from whom it has bought goods and services on an open account of credit.

10 Accounts Payable $85,000

Notes Payable.

Money that is owed to a bank or other lender appears on the balance sheet under notes payable which is evidenced by by a written promisory note that has been given by the company.

11 Notes Payable $ 30,000