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Understanding Financial Statements

CHIDINMA IHENTUGE-ERIC Written by CHIDINMA IHENTUGE-ERIC · 1 min read >

Understanding Financial Statements

One of the most reliable documents an investor needs to analyze the performance of a company is a financial statement. A financial statement is a document that contains the business activities and the financial performance of a company.

It is important you demand the financial statement of any company you wish to invest in.

Investors and financial analysts rely on financial data to analyze the performance of a company and make predictions about the future direction of the company’s stock price. One of the most important resources of reliable and audited financial data is the annual report, which contains the firm’s financial statements.

The financial statements are used by investors, market analysts, and creditors to evaluate a company’s financial health and earnings potential. The three major financial statement reports are the balance sheet, income statement, and statement of cash flows.

These Elements of Corporate Financial accounting are vital items in a financial Statement for key decision-making. They can also be referred to as the building blocks of every Financial Statement

1. Assets

Company resources that yield more revenue/benefits in the future are

called the company’s Assets i.e any item of economic value in the company that generates income for the company. E.g Stock/Inventory when sold generates money. Plants and machinery help in generating income for the company. Assets are classified into Current and Non-Current Assets. Stock and receivables are examples of current assets while land, plants and machinery are examples of Non-Current Assets

2: Liabilities: A company’s liability is referred to the amount owed by the business from its past economic activities. Some of these liabilities can be classified as short or long-term.

3. Equity: This is the company’s money that belongs to the business

owners. It is the amount gotten when the liability is deducted from Assets. Usually, it is a combination of the amount the owners invested in the business plus their retained earnings

4. Revenue: This is the amount made by the company by selling its

goods/services to customers

5. Expenses: This is the amount the company spends on its daily

operations to generate income.

6. Gains: When the market price of a company’s assets appreciates, it is referred to as a gain .. gains are also the extra money the company

makes from outside its regular business activities

7. Loses: this is when the company spends more than it makes. I.e

excess of expenses over revenue

8. Owner’s investment: the amount of cash/assets invested by the

business owners in the business

9. Comprehensive Income: the revenues, gains, expenses, and losses

that impact changes in stockholders’ equity to change during the

accounting period.

10: Distribution of Income

This is the amount paid to the owners of the business earning

As an Entrepreneur, armed with this knowledge after the Corporate Finance Course,  I  can now identify promising opportunities while avoiding undue risk, and make more strategic business decisions.

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