Financial Statements: Reading Between the Lines

Financial statements are an important tool to help better understand either your personal financial success or failure, or that of a business. Generally, financial statements communicate what money is coming in, what money is going out, and where money is now. Namely, there are four main kinds of financial statements, which include: balance sheets, income statements, cash flow statements, and statements of shareholder’s equity. Although they can seem daunting, financial statements can provide efficient and useful information – if you know where to look!  

1.    Decide what to Read
At first glance, financial statements can have an overwhelming amount of information; offering insights on highlights, trends, providing footnotes, definitions, and even historical summaries! If all of this information seems overwhelming – you’re not alone in feeling this way. If you are looking to get the general idea of a financial statement in the case of a business, look over the highlights as well as the letter from the CEO in order to get the general idea and themes of the financial statement. 

2.    Brush up on your Accounting Vocabulary
In order to better the financial health of a company, it’s imperative that the reader understands the income statement, balance sheet, and statement of cash flows- the core of any financial document. Before beginning to read any of these documents, it’s best that the reader becomes somewhat fluent in financial statement and accounting jargon. 

3.    Don’t forget about the Footnotes
If you don’t have time to go through all of the different sections of a company’s financial statements, the footnotes can be a wealth of information. The footnotes to financial statements typically includes a variety of information, such as significant accounting practices and policies, income taxes, pension plans and other retirement programs, as well as stock options. 

4.    Don’t skip the MD&A
The MD&A, or the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, provides investors with a view of the company’s financial performance. This section is useful in understanding what the financial statement’s show or don’t show, in addition to risks, trends and predictions.