Financial statements are very important tools to investors. They are the lens through which the investors get a glimpse into a companies operations and prospects for the future. Understanding financial statements are therefore very important to any investor. While financial statements are supposedly written for the public they are not written by ordinary people. Some of the terms in financial statements need a simple definition (and yes, they do have simple definitions) that can help us to understand exactly what we are looking at.
The income statement is easier to understand through its alternate name the statement of financial performance. It organises company income and expenditure to calculate the profit or loss for the year.
The balance can also be better understood through its alternate name, the statement of financial position. It groups balances as at a point in time to arrive at the position of the company, ultimately the value of assets and liabilities.
The statement of cash flows looks at the activities of a company over the financial period in review to determine whether there has been a growth or decline in cash and cash equivalents. This gives an idea of the liquidity of the company.
Intangible assets are resources owned or controlled by the company which do not have a physical state. Examples are intellectual property rights.
Non-current assets are tangible assets with benefits that are expected to flow to the company for 12 months or more of the date of accounts.
Assets which are expected to be used up within 12 months of the reporting date.
These are obligations the company is expected to settle. It is what the company owes.
This is the residual value to ownership after liabilities have been deducted from assets.
This is the income that is realised from the ordinary business of the company.
Earnings per share
Earnings per share is the total profit divided by the number of shares. It gives a measure of how the company has performed on a per-share basis.
Diluted Earnings per share
Sometimes you will see a distinction between earnings per share stating a basic and a diluted figure. Diluted earnings per share is the value of earnings per share if any people with rights to convert debt or claim shares were to exercise their rights and thus increase the number of shares (dilution).
Accounting rules allow the deduction of interest costs as an expense before arriving at a profit. The EBITDA figure is earnings (profit) before interest, tax, dividend distribution and apportionment of residual profit.
Dividends are distributions of profit made by the company to shareholders. Interim dividends are dividends paid before the full year is up and may be supplemented by further dividends throughout the year.
As assets are used up they experience a reduction in value. Depreciation covers the physical wear and tear of assets through usage. Amortisation is a similar concept but covers a variety of complex things such as rights, licences, contracts and applies the same reduction in value through usage or passage of time as does depreciation.
International Financial Reporting Standards and International Accounting Standards are the rules through which accounting reports are made. There are specific rules for different areas and each standard covers a particular area such as IAS 29 with inflation accounting.
Notes to Financial statements
Not all information is quantifiable and according to accounting standards, the only information that companies are certain of should be included in the financial statements. Non-quantifiable information or information that is not yet certain or probable is included in the notes to the financial statements.
There is a lot to go through in financial statements and if you have further questions about the meaning of anything in financial statements please do ask in the comments section.