How to Read a Financial Report
How to Read a Financial Report

How to Read a Financial Report

The net result of its cash flows of profit-making activities is a $3,105,000 cash increase for the year—an extremely important number that managers, lenders, and investors watch closely. (Location 327)

The profit earned (or loss suffered) by the business for the period. (Location 366)

The financial condition of the business at the end of the period. (Location 368)

The net cash flow from profit-making operations during the year does not equal the amount of profit earned for the year. In fact, it’s not unusual that these two numbers are very different. (Location 371)

Financial condition refers to the assets of the business matched against its liabilities at the end of the period. For example: (Location 378)

The company in this example sells products on credit (Location 383)

Most of the company’s sales are to other businesses, which demand credit. (In contrast, most retailers selling to individuals accept credit cards instead of extending credit to their customers.) (Location 385)

At year-end the company had receivables from sales made to its customers during the latter part of the year. (Location 388)

At year-end, however, many products were still being held in inventory (Location 394)

Only the cost of products sold and delivered to customers during the year should be deducted as expense from sales revenue to measure profit. (Location 395)

The correct timing of recording sales revenue and expenses is called accrual-basis accounting (Location 406)

Managers certainly need to know which assets the business owns and the amounts of each asset, including cash, receivables, inventory, and all other assets. (Location 411)

for keeping the company in a position to pay its liabilities when they come due to keep the business solvent (able to pay its liabilities on time). (Location 414)

And they need to know the profit (or loss) performance of the business. (Location 441)

And, they need a summary of its cash flows for the period. Therefore, these three types of financial information are reported regularly (Location 442)

Net income is the final profit after all expenses are deducted from sales revenue. (Location 522)

The income tax expense does not include other types of taxes, such as unemployment and Social Security taxes on the company’s payroll. These other, nonincome taxes are included in operating expenses. (Location 578)

A balance sheet does not report the flows of activities in the company’s assets, liabilities, and shareowners’ equity accounts during the period. Only the ending balances at the moment the balance sheet is prepared are reported for the accounts. (Location 606)

Current assets are cash and other assets that will be converted into cash during one operating cycle (Location 619)

The operating cycle refers to the sequence of buying or manufacturing products, holding the products until sale, selling the products, waiting to collect the receivables from the sales, and finally receiving cash from customers. (Location 620)

Assets not directly required in the operating cycle, such as marketable securities held as temporary investments or short-term loans made to employees, are included in the current assets class if they will be converted into cash during the coming year. (Location 624)

Broadly speaking, these assets fall into two groups: tangible and intangible assets. (Location 629)

Generally intangible assets are recorded only when the assets are purchased from a source outside the business. (Location 633)

More informally, these assets are called fixed assets, although this term is generally not used in balance sheets. (Location 635)

Until recently, the general practice was to allocate the cost of intangible assets over arbitrary time periods. (Location 649)

Just a quick word of advice here: Retained earnings is not—we repeat, is not—an asset. Get such a notion out of your head. (Location 680)

Many business corporations issue par value stock shares. The shares have to be issued for a certain minimum amount, called the par value, (Location 698)

Put into words, revenue increases an asset or decreases a liability. Expenses decrease an asset or increase a liability. (Location 734)

profit equals the change in assets from revenue and expenses minus the change in liabilities from revenue and expenses. (Location 736)

It might be better to call accrual basis accounting real time accounting. (Location 750)

The stockholders expect the managers of the business to earn a reasonable annual profit on their $23,125,000 equity in the business. (Location 947)

The ability of managers to make sales and to control expenses, and thereby earn profit, is summarized in the income statement. (Location 952)

Earning profit is essential for survival and the business manager’s most important financial imperative. (Location 954)

keeping assets and liabilities within appropriate limits and proportions relative to each other and relative to the sales revenue and expenses of the business. (Location 957)

Business managers really have a threefold financial task: earning enough profit, controlling the company’s assets and liabilities, and generating cash flows. (Location 960)

Beyond profit analysis, business managers should move on to financial condition analysis and cash flows analysis. (Location 972)

In smaller businesses, however, the president or the owner/manager is directly involved in controlling financial condition and cash flow. (Location 976)

if too short, profit opportunities are being missed. (Location 1243)

Compared with manufacturers, resellers have a much easier time determining the cost of the products they sell—although there are a few thorny problems. (Location 1253)

You might think that a business would select the method that gives it the best match with its sales revenue, to get the best measure of gross margin. (Location 1260)

This chapter focuses on the connection between the inventory asset account in the balance sheet and the accounts payable liability in the balance sheet. (Location 1275)

And, last but not least, the company sells products that it purchases from other manufacturers, and these are bought on credit. (Location 1293)

other words, accounts payable are paid much quicker than it takes to sell inventory bought on credit. (Location 1305)