How to Read the Financial Statements on the Annual Report
The main course of any annual report is the financial statements. In this part, you find out what the company owns, what the company owes, how much revenue it took in, what expenses it paid out, and how much profit it made or how much it lost.
When looking at a company’s financial results, make sure that you’re comparing periods of similar length or a similar collection of months.
For example, a retail store usually has much better results in the last quarter of the year (from October to December) because of the holiday season than it does in the first quarter (from January to March). Comparing these two quarters doesn’t make sense when you’re trying to determine how well a business is doing.
To judge a retail company’s growth prospects, compare the fourth quarter of one year with the fourth quarter of another year.
Balance sheet: Also known as the statement of financial position, this document gives a snapshot of a company’s assets and liabilities at a specific point in time.
Income statement: Also known as the profit and loss statement or P&L statement, this document reviews a company’s operations over a specific amount of time. This period can last for one month, one quarter, six months, one year, or any other period indicated at the top of the statement.
Statement of cash flows: This document discusses the actual flow of cash into and out of the company. The statement has three sections focusing on changes to cash status from operations, from investing, and from financing. Like the income statement, the statement of cash flows reflects results over a specific period of time.