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Introduction to Analysis of Financial Statements
- Financial statements enable investors to analyze a company’s ﬁ nancial strength and performance.
- The income statement measures a period of time, whereas the balance sheet is a snapshot of a single day.
- All three statements are interlinked, with changes to one ultimately affecting the other two.
The Income Statement: From Net Revenue to Net Income
- The income statement shows the revenues, expenses and income recognized over a period of time.
- Companies use accrual accounting to show when revenues and expenses occured, as opposed to when is transferred.
- Gross and operating margins can help reveal important trends about how a company is performing.
The Balance Sheet: Assets, Debts and Equity
- The balance sheet lists all of a company’s assets and liabilities at a certain point in time.
- The proportion of cash, receivables, ﬁxed assets and debt varies by industry.
- Changes in accounts receivables and accounts payables can provide warning signs about a company or its customers
The Cash Flow Statement: Tracing the Sources and Uses of Cash
- The cash ﬂow statement is a link between the balance sheet and the income statement.
- Though a positive change in cash is good, what really matters is how the cash was increased and spent.
- Free cash ﬂow measures how much cash was generated that can be spent at management’s discretion