6 Things To Know About Financial Statements

1. Financial statements dashboards
There are millions of individual investors around the world, while a large percentage of these investors have chosen mutual funds, the vehicle of choice for their investment activities, a very high percentage of individual investors also invest directly in stocks Financial Statements. Prudent investment practices require that we seek quality companies with strong balance sheets, strong earnings and positive cash flow.

If you are a do-it-yourself, or rely on the advice of an investment professional, learning some basic skills in financial statement analysis can be very useful - certainly not only for experts. 30 years ago, businessman Robert Follett wrote a book entitled "How to keep score in business" (1987). His main argument is that in business dollars to keep score, and the dashboard is the financial statements. He acknowledged that "many people do not understand keeping score in business. Were mixed in profits, assets, cash flow and return on investment."

The same could be said today much of public investment, especially when it comes to identifying investment securities in the financial statements. But do not let that intimidate you, you can do. As Michael C. Thomsett says in "Mastering Fundamental Analysis" (1998)

"That's not a secret, the biggest secret of Wall Street  Financial Statements-. And any little specialized industry in the world of finance is so complex that you can not understand the basics -. As its name implies - are L 'single and relatively simple. single factor hindering financial information is jargon, overly complex statistical analysis and complex formulas that do not contain the information that outspoken. "(For more information, see Introduction to fundamental analysis and what are key?)

What follows is a brief discussion of 12 common characteristics of financial statements to consider before you start your journey analytical.

Two. The financial statements of Use
For the purposes of investment analysis, financial statements used are the balance sheet, income statement and cash flow statement. Capital accounts and retained earnings, which rarely occur, contain good to know, but not critical, information, and are not used by financial analysts. A word of caution: there are people in the public investors, who tend to focus only on the income statement and balance sheet, thereby relegating cash flow considerations to a secondary status. It is a mistake, for now, just make a permanent mental note that the cash flow table contains the crucial analytical data. (For more information, please read the report Financial Statements, include the income and most of the cash flows).

Three. Knowing what's behind the numbers
The figures in the financial statements of the Company reflect real-world events. These figures and ratios / indicators derived from financial investment analysis are easier to understand if you can see the underlying realities essentially quantitative information. For example, before you start crunching the numbers, have an understanding of what the company does, its products and / or services and the industry in which it operates Financial Statements.

April. The diversity of financial information
Do not expect the financial statements to fit into a single mold. Numerous articles and books on financial statement analysis have a one-size-fits-all approach users of financial statements. The less experienced investor lost when he or she meets with a presentation of the accounts that are outside the company "typical" or so-called mainstream. Just remember that the diversity of the activities leading to a variety of financial statement presentation users of financial statements. This is especially true in the balance sheet Financial Statements, statement of cash flows and earnings are less sensitive to this phenomenon.

May. The challenge to understand the financial jargon
The lack of standardization of terminology significant financial information complicates the understanding of many accounting entries in the financial statements. This may be confusing for the beginning investor Financial Statements. users of financial statements There is little hope that things will change in this area in the near future, but a good financial dictionary can help greatly.

June. Accounting is an art, not a science
The presentation of the financial position of a company, as portrayed in its financial statements is influenced by estimates and judgments by management. In the best of cases, management is scrupulously honest and straightforward Financial Statements, while external auditors are demanding, rigorous and uncompromising. In any case, the inaccuracy can find itself in the accounting process means that the prudent investor should adopt a curious and skeptical approach to the analysis of financial statements. (For related content, see Do not forget to read the prospectus and how to read the notes - Part 2 Risk assessment of accounting.)