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How to read 5 types of financial statements?

Art of reading 5 types of financial statements

Financial statements are a part of company’s annual report, when doing fundamental analysis of the company every needs to have a look on the company’s financial statements.

Now before digging down deep, you must understand what the types of financial statements are, financial statements are of five major types those are:

  1. Balance sheet
  2. Income statements
  3. Cash n cash flow statements
  4. Statements of change in equity
  5. Footnotes to financial statements

These all are the types of financial statements where each type of statement have its own separate importance. Balance sheet states about the capital expenditure which contributes to the assets of the company, while income statements talk about the revenue, growth, sales, and the profit for 1 year, cash n cash flow statements talk about generating, lending and operating cash flows in the company and the other two statements cover the rest information about the company.

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But before going forward you must understand the financial statements can also be classified on another base, the financial statements for the company are prepared as:

  • Consolidated, and
  • Standalone

Standalone v/s Consolidated financial statements

Standalone

Standalone financial statements are balance sheet, P&L and cash flow statements for the same parent company and its branch.

It means that if you are going to take the standalone financial statements of the Tata sons, you are going to cover the financials of the business that Tata sons runs, neither of their subsidiary nor their associated are going to make up to the financials of the tata sons when talk about the standalone financial statements.

Subsidiaries belong to the same parent company which run under the name of the parent company with the condition for to be called as subsidiary is that the parent company must have more than 50% stakes in the company

Associates, for the company B to be called as the associate of A, when A has its stake holding in the company B ranging from 20% to 50%.

So, standalone will be going to consider its financials from:

·        Neither subsidiary

·        Nor associates

·        Only parent Head offices and branches

Consolidated

The consolidated financial statements include the profits, revenue losses from the head offices, subsidiary and associated that is why it is called as consolidated financial statements.

Subsidiaries are the one which has more than 50% of the main company, so for consolidated financial statements these subsidiaries must give their financial reports to their major stake holding company.

Same as the case with associated they are the one with stake holding ranging from 20% to 50% they will also be going to report to listed holding company for making consolidated report statements.

  • Head offices and branches
  • All Subsidiary
  • All associates

Types of financial statements

As listed previously in the article the financial statements are of 5 types:

  1. Balance sheet
  2. Income statements
  3. Cash n cash flow statements
  4. Statements of change in equity
  5. Notes for financial statements

Most of the experts only talk about the first 3 statements which are balance sheet, income statements and cash flow statements because they are highly significant to the influence of profits and loss, revenue and growth, cash expenses and generation of cash flow but the rest two are also very important when someone talk of doing fundamental analysis of the company.

So, this article will address all financial statements one by one:

Balance Sheet

Balance sheet statements are also called as the statements of financial standings. As they tell us about the company’s assets, liabilities, and equity.

Balance sheet are the financial statements till the year ended, it means if the balance sheet is prepared on 31st March 2021, then the statement of balance sheet is written as balance sheet of the company ABC till the year ended 2021.

It means they are not meant for only 1 year, they are the revised statements, the new calculations are going to be re-written on the old calculation.

There is a common equation which satisfies all three entities of balance sheet i.e.:

Assets = liabilities + shareholder’s equity

Assets

Assets are the things which company own, and it has some value, not on the rent, they are meant for futuristic approach. Assets are of two types i.e., current assets and non-current assets.

Current assets are also called as short-term assets which are going to exhausted or converted into cash within the coming 12 months.

Non-current assets are also called as long-term assets/ fixed assets which are not to harmed or converted in the next 12 months/ 1 year.

For example: current assets may be of the type of cash and cash equivalents, while non-current assets are of the types of property, land equipment’s.

Liabilities

Liabilities are something which company owe, you can associate it with debt obligations, in-fact they are on the rent which must be payment by the company.

Same as assets they are also of two types of short-term liabilities and long-term liabilities.

Short term liabilities are to be meant for 12 months while the long-term debt obligation and not going to be sort out in next 12 months.

For example: the short- and long-term debt obligations, daily expenditure, and dividends pay-outs to the shareholders.

Equity

When you say equity it not only means shareholder’s equity, but it is also the promoter’s equity, preferred shareholders equity, retail shareholders equity and other institutional investors equity.

And simply it is the difference between the assets and liabilities.

Later in this article you will going to check the change in shareholder’s equity which is also the part of fundamental analysis, you know there are lots of method to do the fundamental analysis in which shareholding pattern is also a part.

Income statement

Income statements are also called as Profit and loss statements, which certainly talks about the revenue, expenses and profit and loss.

It is always between the duration, or when defining the income statements the words during and between is always used.

Income statements are made on monthly basis, quarterly basis, half yearly and annual basis.

Alike the balance sheet statement it also has the equation equating revenue, expenses, and profit/ loss.

Profit/ loss = (Revenue – Expenses)

Revenue

Revenue is most of the time regarded gross sale of the product, while you must understand that the revenue has two type

  • Operating revenue
  • Non-operating revenue

Operating revenue, the gross sales we are talking is the type of operating revenue, it is more or like the direct revenue

  1. it is the revenue earned through investing money on stock market
  2. or giving loans to organisation and earning interest count in non-operating revenue
  3. or selling property of the company
  4. anything in the profit or money making which is not direct product of the company.

Expenses

It is like the other side of the coin, like if you have revenue, you have expenses too, it is the subtracting factor in the equation of income statements.

Expenses are of two types:

  • ·        Primary expenses
  • ·        Secondary expenses

Primary expenses regard to direct expenses which are directly due to product manufacturing, shipment, which ever the expenses involved in the product cycle of the company. Like cost of good sold, inventory loss, daily labour expenditure, etc

Secondary loss is the one which are not involved in the product cycle, like become loan deficit, unable to pay loans, real-estate exploitation due to natural calamity, etc.

Cash flow statement

Simple, the statement which depicts the movement of the cash and cash equivalents, the movements can be of three types:

  • ·        Cash investment
  • ·        Cash operation
  • ·        Cash financing in activities.

investment, is the section of cash flow statements which tells about the various investment of the company, talks about the cash outflows.

Operation, helps investor to understand how much cash is generated from the operations of the company, talk about the cash generation

Financing, in this section it states that from where and how much financing a company is getting, none the less it is a section which tells about the cash inflows.

Statements of change in shareholder's equity

This statement gives a detailed overview about the investment company is getting from selling the equity of the company, it is mostly prepared with the annual report.

Footnotes to Financial statements

Footnotes to financial statements cover all the rest information which the company management want to convey to the public or to the market.

Fundamental analysis has 2 parts:

  • 1.      Qualitative analysis
  • 2.      Quantitative analysis

You can say that whole qualitative analysis is covered in this section of the financial statements, where company talks about the company’s management, growth mentality and other future policy which the company want to execute in the future. For some companies it is mandatory to give the disclosure to the public in their annual report.

There are certain notes like 1-A, 11-B are written on the balance sheet and other financial statements of the annual report so the full explanation of these notes were given in the footnotes to financial statements section of the financial statements, which comes under the part of quantitative analysis part of fundamental analysis of the company.

Footnotes also helps investor to make the decision on either to bet on the company or not, but it will be advisable to readers that to consider all possible indicators in financial statements before coming to any decision.

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