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This article is from the free online. This tells you how much the company actually earned or lost during the accounting period. Did the company make a profit or did it lose money?
Most income statements include a calculation of earnings per share or EPS. This calculation tells you how much money shareholders would receive for each share of stock they own if the company distributed all of its net income for the period. To calculate EPS, you take the total net income and divide it by the number of outstanding shares of the company. This is important because a company needs to have enough cash on hand to pay its expenses and purchase assets.
While an income statement can tell you whether a company made a profit, a cash flow statement can tell you whether the company generated cash. A cash flow statement shows changes over time rather than absolute dollar amounts at a point in time.
The bottom line of the cash flow statement shows the net increase or decrease in cash for the period. Generally, cash flow statements are divided into three main parts. Each part reviews the cash flow from one of three types of activities: 1 operating activities; 2 investing activities; and 3 financing activities.
For most companies, this section of the cash flow statement reconciles the net income as shown on the income statement to the actual cash the company received from or used in its operating activities. To do this, it adjusts net income for any non-cash items such as adding back depreciation expenses and adjusts for any cash that was used or provided by other operating assets and liabilities. The second part of a cash flow statement shows the cash flow from all investing activities, which generally include purchases or sales of long-term assets, such as property, plant and equipment, as well as investment securities.
If a company buys a piece of machinery, the cash flow statement would reflect this activity as a cash outflow from investing activities because it used cash. If the company decided to sell off some investments from an investment portfolio, the proceeds from the sales would show up as a cash inflow from investing activities because it provided cash.
The third part of a cash flow statement shows the cash flow from all financing activities. Typical sources of cash flow include cash raised by selling stocks and bonds or borrowing from banks. Likewise, paying back a bank loan would show up as a use of cash flow.
He finished seventh, but if he had won, it would have been a victory for financial literacy proponents everywhere. The footnotes to financial statements are packed with information. Here are some of the highlights:. It is intended to help investors to see the company through the eyes of management. Listed below are just some of the many ratios that investors calculate from information on financial statements and then use to evaluate a company.
As a general rule, desirable ratios vary by industry. If a company has a debt-to-equity ratio of 2 to 1, it means that the company has two dollars of debt to every one dollar shareholders invest in the company. In other words, the company is taking on debt at twice the rate that its owners are investing in the company. Operating margin is usually expressed as a percentage. It shows, for each dollar of sales, what percentage was profit. Although this brochure discusses each financial statement separately, keep in mind that they are all related.
Cash flows provide more information about cash assets listed on a balance sheet and are related, but not equivalent, to net income shown on the income statement. And so on. No one financial statement tells the complete story.
But combined, they provide very powerful information for investors. Search SEC. Securities and Exchange Commission. Investor Publications.
Beginners' Guide to Financial Statement. The Basics If you can read a nutrition label or a baseball box score, you can learn to read basic financial statements. There are many ways to format the assets section, but the most common size balance sheet divides the assets into two sub-categories: current and non-current. The current assets include cash, accounts receivable, and inventory. These resources are typically consumed in the current period or within the next 12 months. The non-current assets section includes resources with useful lives of more than 12 months.
In other words, these assets last longer than one year and can be used to benefit the company beyond the current period. The most common non-current assets include property, plant, and equipment. Liabilities are debt obligations that the company owes other companies, individuals, or institutions. These range from commercial loans, personal loans, or mortgages. This section is typically split into two main sub-categories to show the difference between obligations that are due in the next 12 months, current liabilities, and obligations that mature in future years, long-term liabilities.
Current debt usually includes accounts payable and accrued expenses. Both of these types of debts typically become due in less than 12 months. The long-term section includes all other debts that mature more than a year into the future like mortgages and long-term notes.
Equity consists of the ownership of the company.
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