What are financial statements - for non accountants!

Reading financial statements can seem intimidating for non-accountants, but with some basic understanding, it becomes more accessible. Here are a few key steps to help non-accountants read financial statements:

1. Understand the Components: Financial statements typically consist of three main components: the balance sheet, the income statement, and the cash flow statement. Familiarize yourself with the purpose and content of each statement.

2. Balance Sheet: The balance sheet provides a snapshot of a company's financial position at a specific point in time. It presents assets (what the company owns), liabilities (what the company owes), and shareholders' equity (the company's net worth). Pay attention to the relationship between assets and liabilities, as it indicates the company's financial health.

3. Income Statement: The income statement, also known as the profit and loss statement, shows a company's revenues, expenses, and resulting net income or loss over a specified period. It highlights the company's performance, indicating whether it is generating profit or incurring losses. Focus on the revenue sources and the major expense categories to understand the company's primary operations.

4. Cash Flow Statement: The cash flow statement tracks the inflows and outflows of cash during a specific period. It categorizes cash flows into three main sections: operating activities, investing activities, and financing activities. By analyzing the cash flow statement, you can assess the company's ability to generate and manage cash.

5. Key Ratios and Trends: Look for key financial ratios and trends to gain further insights. Ratios like profitability ratios (e.g., gross profit margin, net profit margin), liquidity ratios (e.g., current ratio, quick ratio), and solvency ratios (e.g., debt-to-equity ratio) provide valuable information about the company's financial performance and health.

6. Compare and Benchmark: Compare the financial statements with industry benchmarks or competitors to gauge the company's performance relative to its peers. This comparison can help identify strengths, weaknesses, and areas for improvement.

7. Seek Explanatory Notes: Financial statements often include explanatory notes that provide additional details and context. Pay attention to these notes to gain a deeper understanding of the accounting policies, significant events, and potential risks affecting the financial statements.

8. Seek Professional Guidance: If needed, consider consulting with an accountant or financial professional who can provide further interpretation and guidance. They can help explain complex concepts, answer specific questions, and provide insights tailored to your needs.

Remember, reading financial statements is an iterative process. The more you familiarize yourself with the statements and financial concepts, the more comfortable you'll become. Continuous learning and exposure to financial statements will enhance your understanding over time.