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Financial statement

The financial statements include the Income Statement, Balance Sheet, Statement of Shareholders' Equity, Statement of Cash Flows, and Footnotes. These are presented to shareholders, the public, and the SEC in a company's quarterly and annual reports.

Expanded Definition

As a group, the financial statements present the financial position of a company at a particular moment in time and activity of that company for a period leading up to that moment. Using these, an analyst can determine the health of a company, its likely prospects going forward, and whether or not an investment in the shares or debt of the company would likely be profitable.

Brief descriptions

The Balance Sheet presents the company's financial position at a moment in time, like a picture or a snapshot. It is accurate as of that moment and inaccurate the very next, as money flows into and out of the company. One is presented in each quarterly and annual report and dated for the end of the respective period of time.

The Income Statement or Statement of Operations shows the revenue generated during the time period reported and then subtracts out various expenses to arrive at net income (profit).

The Statement of Shareholders' Equity shows changes over the time period to the equity portion of the balance sheet such as new shares issued or shares repurchased.

The Statement of Cash Flows reconciles net income (a GAAP number) with the actual cash flowing into and out of the company from the end of the last fiscal year up to the end of the current reporting period. In other words, it's cumulative, unlike the Income Statement.

The Footnotes expand upon the above statements and are an integral part of the financial statements, providing more detail on things like:

  • How revenue is recognized (that is, it answers the question, "When can the company say something has actually been sold?")
  • Expansion of the stock based compensation expense (before this was expensed on the income statement, the footnotes were the only place to see this item, and who reads footnotes anyway?)
  • Segment information such as individual categories of products (like Apple's iPod sales vs. computer sales) and sales broken up by geography
  • Expanded details on various balance sheet line items, such as how inventory is broken down among raw materials, goods in progress, and finished goods
  • And many other things.

It is worth the time and effort to go through the footnotes. Many times, companies bury stuff in them that they'd rather not make public but have to. A careful reading of the footnotes would have (and did, to some) pointed out the problems at Enron long before that company collapsed.

Where to find them

While many sites such as our very own CAPS, Yahoo! Finance, Google Finance, Morningstar, etc. present most of the numbers in a convenient to view and easy to use manner, there is no substitute for rolling up your sleeves and going to the source documents, the actual quarterly and annual reports, to get the low down on what is happening at your favorite company.

The main reason for going to the source documents, other than a desire to get bogged down in company-speak, is to get past the sometimes simplistic, inappropriate, or annoying grouping of different items from the statements into one line item on the summary presentation.

The SEC's Edgar website is easy to use. (Note: that link takes you out of Fooldom.) Type in the ticker symbol in the indicated box to view a list of all the SEC forms a company files. To filter it down, type 10-K (for annual reports) or 10-Q (for quarterly reports) in the "Form type" box in the upper right. For many foreign companies, the 20-F is the appropriate form. Click the document you wish to review, open it (usually it's the first choice on any resulting list), and then scroll down to the financial statements.

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