How to Read a Financial Report. John A. Tracy
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Название: How to Read a Financial Report

Автор: John A. Tracy

Издательство: John Wiley & Sons Limited

Жанр: Ценные бумаги, инвестиции

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isbn: 9781119606482

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СКАЧАТЬ turn out to be fairly close to the correct accounting amounts—or, they could be vastly different. Even small differences between the cash flow amounts and the correct accounting amounts can cause problems.

      The cash flows summary for the year does not reveal the financial condition of the company. Managers certainly need to know which assets the business owns and the amounts of each asset, which can include cash, receivables, inventory, among others. Also, they need to know which liabilities the company owes and the amounts of each.

      Business managers have the responsibility for keeping the company in a position to pay its liabilities when they come due. In other words, managers have to keep the business solvent (able to pay its liabilities on time) and liquid (having enough available cash to meet its needs). Furthermore, managers have to know whether assets are too large (or too small) relative to the sales volume of the business. A company’s lenders and investors want to know the same things.

      In brief, both the managers inside the business and the lenders and investors outside the business need a summary of a company’s financial condition (its assets and liabilities). They also need a profit performance report, which summarizes the company’s sales revenue, expenses, and profit for the year.

      In this chapter we have explained that a cash flows summary has its limits—in particular, it does not report profit and does not present the financial condition of a business. Nevertheless, a cash flows summary is useful. In fact, a different version of what is shown in Exhibit 1.1 is one of the three primary financial statements reported by every business. But in no sense does a cash flows summary take the place of the profit performance report or the financial condition report. The next chapter introduces these two financial statements. Chapter 3 then moves on to the statement of cash flows, which is a more formal financial statement than the summary discussed in this chapter.

      Over the past century (and longer) the accounting profession has developed. One of its main functions is to prepare and report business financial statements. A primary goal of the accounting profession has been to develop and enforce accounting and financial reporting standards that apply to all businesses. In other words, there is an authoritative “rule book” that businesses should obey in accounting for profit and in reporting profit, financial condition, and cash flows. Businesses are not free to make up their own individual accounting methods and financial reporting practices. The established rules and standards are collectively referred to as generally accepted accounting principles (GAAP). But things are getting more complicated these days.

      Presently in the United States there are continuing developments to adopt separate rules for private companies versus public companies, and for small companies versus larger companies. Furthermore, efforts to harmonize American accounting and financial reporting standards with those of other countries keep slogging along. There has been a lot of standardization. Yet, there are several areas of accounting and financial reporting in which there are differences between countries. We say more about the changing landscape of accounting and financial reporting standards in later chapters.

      Business managers, lenders, and investors need to know the financial condition of a business. They need a report that summarizes the business entity’s assets and liabilities, as well as the ownership residual of its assets in excess of liabilities. And they need to know the profit (or loss) performance of the business. They need information that summarizes sales revenue and expenses for the most recent period and the resulting profit or loss.

      The means of communicating such financial information are financial statements. Accountants prepare the financial statements. They are the financial scorekeepers of the entity. Financial statements are sent regularly by a business to its managers, lenders, and investors—and, anyone else with a legitimate interest in the business for that matter. Financial condition is communicated in an accounting report called the balance sheet. Profit-motivated activities are presented in an accounting report called the income statement.

      Alternative titles for the balance sheet include the statement of financial condition or the statement of financial position. An income statement may be titled as a statement of operations or an earnings statement. We stick with the names balance sheet and income statement to be consistent throughout the book. Informally, financial statements are called simply financials.

      In almost all cases financial statements are supplemented with additional information, which is presented in footnotes and supporting schedules. One very common supporting schedule is the statement of changes in stockholders’ (owners’) equity. The broader term financial report refers to all this, plus any additional commentary from management, narrative explanations, graphics, and promotional content that accompany the financial statements, footnotes, and supporting schedules. Distribution of the financial reports of a private business may be restricted to its top-level managers, its shareholders, and major creditors. Federal laws require publicly owned businesses to make their financial reports publicly available.

Dollar Amounts in Thousands
Sales Revenue $ 52,000)
Cost of Goods Sold Expense (33,800)
Gross Margin $ 18,200)
Selling, General, and Administrative Expenses (12,480)
Depreciation Expense (785)
Earnings Before Interest and Income Tax $ 4,935)
Interest Expense (545)
Earnings Before Income Tax $ 4,390)
Income Tax Expense СКАЧАТЬ