Taking care of the financial accounting for your business means knowing how to (and who should) read the financial report. This list of questions and answers is a guide for finding accounting information on a financial report and how to interpret the financial data.
Q: Who should read the financial report of a business?
A: Its internal managers and its external investors and lenders. The standard-issue financial statements in the financial report are designed with external users in mind.
Q: Where do I find the bottom-line profit made by a business?
A: In the last line in the income statement, which summarizes the sales revenue, income, expenses, and losses of a business for a quarter or year. The amount of bottom-line net income depends, to some extent, on whether the business chooses conservative (cautious) or liberal (optimistic) accounting methods for recording its sales revenue and expenses.
Q: Where do I find the summary of a business’s assets and liabilities?
A: In the balance sheet, which also reports the sources of its owners’ equity. The dollar amounts reported in a balance sheet reflect the historical transactions of the business. The sales revenue and expenses in the income statement propel many of the assets and liabilities in the balance sheet.
Q: How can I find out whether a business has a healthy cash flow?
A: Read the business’s statement of cash flows. To learn the cash flow generated from making profit, look in the first section of the statement of cash flows. Never forget: Sales revenue and expenses in the income statement are not cash flows; the income statement is the wrong place to find cash flows.
Q: Are the bottom-line profit and other key numbers in the financial statements I’m reading objective, above-board, and trustworthy?
A: There’s a fair chance that the business has, within tolerable limits, manipulated the amounts reported for its sales revenue and expenses and for certain assets and liabilities, which is generally called massaging the numbers. Savvy investors and lenders know about this process and treat the numbers accordingly. But investors and lenders do not tolerate accounting fraud (also called cooking the books), which refers to deliberate falsifications and gross distortions.
Q: Does its balance sheet tell me what the business is worth?
A: The short answer is no, but read on. The market price of a business, or its stock shares, depends mainly on its predicted profit performance in the future. Its income statements over the recent past are the basis for forecasting its future profit performance. Its balance sheet reports the assets the business uses to earn profit and the liabilities it is saddled with. A strong balance sheet helps the market value of a business, and a weak balance sheet hurts market value.
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Source:http://www.dummies.com/how-to/content/financial-report-roadmap.html
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