The balance sheet says nothing about how much the company made or lost. Instead, it explains how many assets that the company owns, as well as how much debt it has. If investors are concerned that a company has too much debt, then they will closely watch the balance sheet to see if the debt is growing or decreasing.
Assets listed will include current assets – cash, accounts receivable, inventories, and prepaid expenses – as well as other long-term assets, such as equipment, land and buildings. If the company has assets such as goodwill, those will be listed. Also listed on the balance sheet is stockholder’s equity, which shows how much of the owner’s money is invested in the company.
The Cash Flow Statement
The third report is the statement of cash flows. This measures how much money is coming into the company and what it is being used for, as well as how much money the company has used and where that money went. This is important, because even if a company is profitable, if outgoing money exceeds incoming money, the company could still run into trouble.
Some Caveats to Take Note Of
Everyone has heard of the story of Enron, who with some accounting tricks, managed to trick the mass public and even banks, into believing it was a company with solid potential. Its guise was only discovered when the company had to file for bankruptcy. So what other tricks or cheats are hidden in the financial statements
For one, take a look at the assets column in the balance asset. There are some intangible assets for instance branding, which can never be assessed. Be weary of companies with a high number in this column as there need not be documentary proof to verify the value of such intangible assets. For instance, the value of the Coca-Coka brand itself is rumored to be worth $1 million – thats right, a one followed by six zeros.
Once you learn a few accounting basics, you can add to your knowledge until you obtain mastery of the subject. Eventually, you’ll be reading through statements in a matter of minutes.
After all, shouldn’t investing give you time for a better quality of life without intimidating you will the details?