HOW TO READ A FINANCIAL REPORT
period so that financial statement readers
can easily identify significant changes.
The Income Statement
On the other hand, the income statement
can be thought of more like a motion
pic- ture, since it reports on how a
company performed during the period(s)
presented and shows whether that
company’s opera- tions have resulted in
a profit or loss.
The Statement of Changes
in Shareholders’ Equity
The statement of changes in shareholders’
equity reconciles the activity in the equity
section of the balance sheet from period
to period. Generally, changes in
shareholders’ equity result from company
profits or losses, dividends and/or stock
issuances. (Dividends are payments to
shareholders to compensate them for their
investment.)
The Statement of Cash Flows
The statement of cash flows reports on
the company’s cash movements during
the period(s) separating them by
operating, investing and financing
activities.
The Footnotes
The footnotes provide more detailed
infor- mation about the financial
statements.
This booklet will focus on the basic
financial statements, described above,
and the related footnotes. It will also
include some examples of methods that
investors can use to analyze the basic
financial statements in greater detail.
Additionally, to illustrate how these con-
cepts apply to a hypothetical, but realistic
business, this booklet will present and
2 analyze the financial statements of a
model company.
A MODEL COMPANY CALLED
“TYPICAL”
To provide a framework for illustration,
a fictional company will be used. It will
be a public company (generally, one
whose shares are formally registered with
the Securities and Exchange Commission
[SEC] and actively traded). A public com-
pany will be used because it is required
to provide the most extensive amount
of information in its annual reports. The
requirements and standards for financial
reporting are set by both governmental
and nongovernmental bodies. (The SEC
is the major governmental body with
responsibility in this arena. The main
nongovernmental bodies that set rules
and standards are the Financial
Accounting Standards Board [FASB]*,
the American Institute of Certified Public
Accountants [AICPA] and the exchanges
the securities trade on.
This fictional company will represent
a typical corporation with the most com-
monly used accounting and reporting
practices. Thus, the model company will
be called Typical Manufacturing Company,
Inc. (or “Typical,” for short).
* The FASB is the primary, authoritative private-
sector body that sets financial accounting standards.
From time to time, these standards change and
new ones are issued. At this writing, the FASB
is considering substantial changes to the current
accounting rules in the areas of consolidations,
segment reporting, derivatives and hedging, and
liabilities and equity. Information regarding current,
revised or new rules can be obtained by writing or
calling the Financial Accounting Standards Board,
401 Merritt 7, P.O. Box 5116, Norwalk, CT
06858-5116, telephone (203) 847-0700.