Reading Financial Reports For Dummies - Lita Epstein

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target="_blank" rel="nofollow" href="#fb3_img_img_9a624999-be9d-5ebb-8210-d90151f47e55.png" alt="Remember"/> This icon highlights information you definitely want to remember.

      

This icon points out a critical piece of information that can help you identify the dangers and perils in financial reports. I also use this icon to emphasize information you definitely don't want to skip or skim when reading a financial report.

      

This icon highlights information that may explain the numbers in more detail than you care to know. Don't worry; you can skip these points without missing the big picture!

      

Throughout the book, I give examples from financial reports of real companies, particularly Mattel and Hasbro. I highlight these examples with the icon you see here.

      In addition to the material in the print or e-book you're reading right now, this product comes with some access-anywhere goodies on the web. You'll probably need reminders about the key parts of an annual report or the best financial analysis formulas to use. To view the Cheat Sheet, go to www.dummies.com and type “Reading Financial Reports For Dummies Cheat Sheet” in the search box.

      You can start reading anywhere in this book, but if you're totally new to financial reports, you definitely want to start with Part 1 so you can get a good handle on the basics before delving into the financial information. If you already know the basics, turn to Part 2 to begin dissecting the parts of a financial report. And to get started on the road to analyzing the numbers, turn to Part 3. If your priority is tools for optimizing company operation, you may want to begin with Part 4. Turn right to Part 5 if you want to know more about company outsiders involved in the financial reporting process.

      Getting Started with Financial Reports

       Explore the types of financial reports and get to know the key financial statements.

       Discover business types and their tax rules, including sole proprietorships, partnerships, and limited liability companies.

       Differentiate between public and private companies, and understand what it means when a company decides to go public.

       Understand accounting basics — enough to understand different kinds of profit, and to distinguish debits from credits.

      Opening the Cornucopia of Reports

      IN THIS CHAPTER

      

Reviewing the importance of financial reports

      

Exploring the different types of financial reporting

      

Discovering the key financial statements

      Financial reports give a snapshot of a company's value at the end of a particular period, as well as a view of the company's operations and whether it made a profit. The business world couldn't function without financial reports. Yes, fewer scandals would be exposed because companies wouldn't be tempted to paint false but pretty financial pictures, but you'd still need a way to gauge a firm's financial health.

      Currently, nothing's available that can possibly replace financial reports. Nothing can be substituted that'd give investors, financial institutions, and government agencies the information they need to make decisions about a company. And without financial reports, the folks who work for a company wouldn't know how to make it more efficient and profitable because they wouldn't have a summary of its financial activities during previous business periods. These financial summaries help companies look at their successes and failures and make plans for future improvements.

      This chapter introduces you to the many facets of financial reports and shows you how internal and external players use them to evaluate a company's financial health.

      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 following:

       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 investing in the company's future is worthwhile.

      Preparing the reports

      A company's accounting department is the key source of its financial reports. This department is responsible for monitoring the numbers and putting together the reports. The numbers are the products of a process called double-entry accounting, which requires a company to record resources and the assets it uses to get those resources. For example, if you buy a chair, you must spend another asset, such as cash. An entry in the double-entry accounting system shows both sides of that transaction — the cash account is reduced by the chair's price, and the furniture account value is increased by the chair's price.

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