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UNDERSTANDING FINANCIAL STATEMENTS Financial statements provide the fundamental information that we use to analyze and answer valuation questions. It is important, therefore, that we understand the principles governing these statements by looking at four questions: • How valuable are the assets of a firm?
What are financial statements? The financial statements. Financial statements are written records that illustrates the business activities and the financial performance of a company. In most cases they are audited to ensure accuracy for tax, financing, or investing purposes.
FINANCIAL STATEMENTS ARE A MIXTURE OF ART & SCIENCE. Accounting requires many judgments and estimations by management. Rules allow for significant variation in how to prepare and present results. It is critical to understand incentives of management and accountants. Not enough to just follow the rules.
The purpose of this whitepaper is to help readers develop an understanding of the basic contours of the three principal financial statements. The balance sheet, income statement, and statement of cash flows are each indispensable components of the “story” that the financial statements tell about a company.
This guide will teach you everything you need to know about how to read financial statements like a balance sheet, cash flow statement, and more.
1 Explain the objectives of financial statement analysis. 2 Describe and use the following four analytical techniques: horizontal analysis, trend analysis, vertical analysis, and ratio analysis. 3 Explain the importance of comparisons and trends in financial statement analysis. 4 Prepare and interpret common-size financial statements.
There are four main financial statements. They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders’ equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time. Cash