Understanding Financial Statments

Generally an accounting department, a bookkeeper or the owner of a business systematically records, sorts and summarizes the thousands of documents (register tapes, invoices and vouchers) representing the transactions of business. These transactions include: sale of merchandise; payroll distribution; material purchases for inventory - to mention just a few. These facts are then compiled, classified and summarized into financial reports for a business so that a financial statement can then be prepared.

Financial statements are customarily prepared on a quarterly, biannual or annual basis. The date of a financial statement is of considerable importance. Most are usually drawn up on a yearly (fiscal) basis. Statements provided that are outside of the fiscal closing are known as interim statements.

 

Whether you're a do-it-yourself or rely on guidance from an investment professional, learning certain fundamental financial statement analysis skills can be very useful - it's certainly not just for the experts. In business you keep score with dollars, and the scorecard is a financial statement. He recognized that "a lot of people don't understand keeping score in business. They get mixed up about profits, assets, cash flow and return on investment.

The numbers in a company's financials reflect real world events. These numbers and the financial ratios/indicators that are derived from them for investment analysis are easier to understand if you can visualize the underlying realities of this essentially quantitative information. For example, before you start crunching numbers, have an understanding of what the company does, its products and/or services, and the industry in which it operates.

A great way to get a better understanding of financial statements is to talk to a CPA. At GMG CPA we are here to help.