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How to Read Financial Statements

To be able to read financial statements readers need to know what financial statements are. Those who have completed Finance and Accounting will have a good understanding, but this chapter will focus on explaining to those who have not graduated or have knowledge of financial accounting before. Therefore, the term financial statement is a financial report that has the following components:

1. Balance sheet (also known as the statement of financial position)
2. Income statement
3. Cash flow statement
4. Notes to financial statements (This is the last section of the statement detailing all of the above statements.)

Small entrepreneurs who are not registered as juristic persons. There is no need to prepare financial statements for the Ministry of Commerce because financial statements are required to be prepared and sent to specific government agencies that are juristic persons only. This provides knowledge about reading financial statements with corporate owners. Or if you are a natural person, you can study the reading of financial statements. Allowing for investment in a business that is a juristic person or for the purchase of shares of a public company listed on the Stock Exchange. Many of you who own a corporate business may not understand how to read financial statements and the benefits of reading financial statements. There are many things as follows.

1. To give credit to the business’s trade accounts receivable (We can read the financial statements of our customers, so we will not incur bad debts later.
2. For investment In the case of purchasing shares or joint ventures with other businesses that are offered for sale
3. Prevent the risks of our own business Because we will know the financial position and ability to operate the business as well.
4. To know the position and management ability of competitors when we can read the financial statements of competitors We know their situation better.
5. To be a benchmark for both the business itself and also to compare it with other successful businesses in the same business as well

Let me explain each budget that is included in the financial statements to understand that each statement shows different results starting from the balance sheet first.

• Balance sheet or statement of financial position

It is a report that shows the financial position of an entity at the end of the year or on a specific date (such as the end of a quarter or the end of a month). The balance sheet is derived from the equation of accounting where both sides are equal, i.e. assets equal liabilities plus equity of the operator hold shares.

That shows what assets the entity will acquire. The money to buy the asset must be from the investment of the shareholders, if it is not enough, it must be borrowed. For example, a company bought a large truck for two million dollars. If the company has only one million dollars in capital, it needs to borrow another million dollars in order to buy assets (trucks) for 2 million dollars.

Therefore, reading the balance sheet is to know whether the status of the business is stable or not. If you have a lot of assets. But with a small amount of capital left over from borrowing money, the business is not stable. Reading the balance sheet is like looking at the status of an individual person. We see that he has many cars, many houses, and many diamond rings. But most of the assets purchased are from borrowing money. We can conclude that this person has a lot of debt. May be bankrupt if he does not have the ability to find money to pay off debts in a timely manner when creditors demand money In reading the balance sheet, we should first read next to the assets what assets are there. If the assets are expired or unsellable inventories, it will be difficult to sell them to pay off debt. or if the property is largely overdue and those debtors are bad debts It shows that the business is a debtor that can not collect the debt itself.

• Income Statement

An income statement is a statement showing the results of business operations. There is a very simple calculation. Income minus all costs and expenses. If the income is more, then there is a profit. If income is less, it means loss. The closing profit and loss statement is popularly prepared every month. and collect for 12 months to close the account and close the financial statements to send to the Ministry of Commerce for the next corporate income tax payment.

When reading the income statement, we should start from the last line of the statement, net profit or loss. To know if the business has a profit or loss If there is loss, look at what the loss is from. What kind of expenses? A profitable business does not always mean that it has the ability to run the business. This may be due to the profit from the sale of the property. or compromise or profit from the currency exchange rate Therefore, the profit and loss statement readers should read carefully where the income comes from. Are the costs and expenses high? What are the unusual costs? and how much profit?

• Cash Flow Statement

These are statements that large companies often make and include in their financial statements. For smaller companies, only the balance sheet and income statement are usually prepared. However, it is important to note that the cash flow statement is a statement that tells us where the cash is coming from and where it is used. The cash flows used and acquired by the business usually come from only 3 business activities:

1. Activities from operations (from the production and distribution of the business)
2. Investment activities (from buying or selling machines or investing in other businesses)
3. Funding activities (from borrowing or repaying a loan)

Notes to financial statements: It is the last part that is considered part of the financial statements, which gives us an idea of ​​the criteria used in the preparation of the financial statements. Accounting policies and other information other than those presented in the financial statements Notes to the statements will help us understand the financial statements more because they will explain the details of the balance sheet, and income statement, where the item is written as a Note Article… This allows the reader of the financial statements to turn over and read the details of the statement in the notes section mentioned. When we read the financial statements of any business, do not forget to read the notes to those financial statements for better understanding.

In conclusion, reading the financial statements gives us an idea of ​​the financial position of the entity (see the balance sheet), and its ability to earn and make a profit. (Profit and loss statement), including knowing the source and use of the cash for its activities. (statement of cash flows) and understand the accounting policy dividend payment and various depreciation deduction criteria and other information of the business.