Wednesday, July 9, 2014

Figuring Out Financial Reporting


Financial reporting gives readers a summary of what happens in a company
based purely on the numbers. The numbers that tell the tale include the

Assets: The cash, marketable securities, buildings, land, tools, equipment,
vehicles, copyrights, patents, and any other items needed to run a
business that a company holds.

Liabilities: Money a company owes to outsiders, such as loans, bonds,
and unpaid bills.

Equity: Money invested in the company.

Sales: Products or services that customers purchase.

Costs and expenses: Money spent to operate a business, such as expenditures
for production, compensation for employees, operation of buildings
and factories, or supplies to run the offices.

Profit or loss: The amount of money a company earns or loses.

Cash flow: The amount of money that flows into and out of a business
during the time period being reported.

Without financial reporting, you’d have no idea where a company stands
financially. Sure, you’d know how much money the business has in its bank
accounts, but you wouldn’t know how much is still due to come in from customers,
how much inventory is being held in the warehouse and on the shelf,
how much the firm owes, or even how much the firm owns. As an investor, if
you don’t know these details, you can’t possibly make an objective decision
about whether the company is making money and whether it’s worth investing
in the company’s future.

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