Complete Guide To Corporate Finance


Financial Statements - Introduction

Financial reporting is the method a firm uses to convey its financial performance to the market, its investors, and other stakeholders. The objective of financial reporting is to provide information on the changes in a firm's performance and financial position that can be used to make financial and operating decisions. In addition to being a management aid, this information is used by analysts to forecast the firm's ability to produce future earnings and as a means to assess the firm's intrinsic value. Other stakeholders, such as creditors, will use financial statements as a way to evaluate the company's economic and competitive strength.

The timing and the methodology used to record revenues and expenses may also impact the analysis and comparability of financial statements across companies. Financial statements are prepared in most cases on the basis of three basic premises:

1. The company will continue to operate (going-concern assumptions).

2. Revenues are reported as they are earned within the specified accounting period (revenues-recognition principle).

3. Expenses should match generated revenues within the specified accounting period (matching principle).

Furthermore, financial statements are prepared using one of two basic accounting methods:

1. Cash-basis accounting - This method consists of recognizing revenue (income) and expenses when payments are made (when checks are issued) or when cash is received (and deposited in the bank).

2. Accrual accounting - This method consists of recognizing revenue in the accounting period in which it is earned, that is, when the company provides a product or service to a customer, regardless of when the company gets paid. Expenses are recorded when they are incurred instead of when they are paid for.

Financial statements don't fit into a single mold. Many articles and books on financial statement analysis take a one-size-fits-all approach. The less-experienced investor then gets lost when he or she encounters a presentation of accounts that falls outside the so-called "typical" company. Remember that the diverse nature of business activities results in different financial statement presentations.
The balance sheet is particularly likely to be presented differently from company to company; the income and cash flow statements are less susceptible to this phenomenon.

Knowing how to work with the numbers in a company's financial statements is an essential skill. The meaningful interpretation and analysis of balance sheets, income statements and cash flow statements to discern a company's investment qualities is the basis for smart investment choices.

(To learn more, read 12 Things You Need To Know About Financial Statements, our Basic Financial Statement Analysis tutorial and our Advanced Financial Statement Analysis tutorial.)

The Balance Sheet
Related Articles
  1. Investing

    What a Family Tradition Taught Me About Investing

    We share some lessons from friends and family on saving money and planning for retirement.
  2. Investing

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  3. Professionals

    4 Must Watch Films and Documentaries for Accountants

    Learn how these must-watch movies for accountants teach about the importance of ethics in a world driven by greed and financial power.
  4. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  5. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  6. Entrepreneurship

    Identifying And Managing Business Risks

    There are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
  7. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  8. Forex Education

    Explaining Uncovered Interest Rate Parity

    Uncovered interest rate parity is when the difference in interest rates between two nations is equal to the expected change in exchange rates.
  9. Fundamental Analysis

    Using Decision Trees In Finance

    A decision tree provides a comprehensive framework to review the alternative scenarios and consequences a decision may lead to.
  10. Economics

    Understanding Tragedy of the Commons

    The tragedy of the commons describes an economic problem in which individuals try to reap the greatest benefits from a given resource.
  1. Horizontal Line

    A line that appears to proceed from left to right, or parallel ...
  2. Accountant

    A professional who performs accounting functions such as audits ...
  3. Rule Of 72

    A shortcut to estimate the number of years required to double ...
  4. Laissez Faire

    An economic theory from the 18th century that is strongly opposed ...
  5. Personal Finance

    All financial decisions and activities of an individual or household, ...
  6. Audit

    An unbiased examination and evaluation of the financial statements ...
  1. What should I study in school to prepare for a career in corporate finance?

    Depending on which area you want to specialize in, corporate finance can be one of the most competitive fields in business. ... Read Full Answer >>
  2. Why would a company issue preference shares instead of common shares?

    Preference shares, or preferred stock, act as a hybrid between common shares and bond issues. As with any produced good or ... Read Full Answer >>
  3. What is the difference between cost of debt capital and cost of equity?

    In corporate finance, capital – the money a business uses to fund operations – comes from two sources: debt and equity. While ... Read Full Answer >>
  4. What is the difference between gross profit, operating profit and net income?

    The terms profit and income are often used interchangeably in day-to-day life. In corporate finance, however, these terms ... Read Full Answer >>
  5. What’s the difference between the two federal student loan programs (FFEL and Direct)?

    The short answer is that one loan program still exists (Federal Direct Loans) and one was ended by the Health Care and Education ... Read Full Answer >>
  6. Can working capital be depreciated?

    Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center