What are company financial statements?
Financial statements are documents designed to give investors a snapshot of how a business is performing over a particular period. Financial statements answer some important questions investors should ask before buying a stock, such as:
Income statementA company's income statement tells you how much money a company brought in and how much of a profit (hopefully) it earned from that revenue.
- The “top-line” number: The first major number on the income statement is a company's net sales or revenues, also known as the top-line number. In many cases a company's income statement will break down different sources of income. For example, Apple's (AAPL -0.7%) income statement breaks its revenue into product sales and service revenue.
- Net income (earnings): From there, the company's cost of sales is subtracted to produce its gross income. Its operating costs (like research and development) are subtracted to calculate its operating income. Then income tax expenses are subtracted, and the result is the company's net income, also known as its "earnings." Net income is often expressed both as one large number and by share (the latter being earnings per share, or EPS).
Balance sheetA balance sheet gives you a snapshot of a company's financial condition at a given time (typically the end of a quarter). And as with the income statement, the data is typically presented as a comparison between the current period and the same time a year prior.There are three sections on a balance sheet:
- Assets: What the company owns. This is further broken down into current and noncurrent assets. Current assets include liquid assets and assets that can be expected to become liquid within a year. Examples include cash, short-term Treasuries, accounts receivable, and inventory. Noncurrent assets include long-term investments, real estate, and equipment used in manufacturing, just to name a few.
- Liabilities: What the company owes. These are also divided into current and noncurrent. Current liabilities include payments a company will have to make within a year, such as accounts payable and short-term debt. Noncurrent liabilities include things like long-term debts.
- Shareholder's equity: Think of shareholder's equity as what the company would have if it shut down, sold all of its assets, and paid all of its debts. Shareholder’s equity is the difference between assets and liabilities and is the company's net worth.
Cash flow statementA company's cash flow statement shows the money flowing into and out of the business. This is broken down into a few categories:
- Operating activities: This includes the net income from the company's business, stock-based compensation, receivables collected, accounts payable that were paid, and other business-related items.
- Investing activities: If a business buys or sells stocks or bonds, this activity is included in this part of the cash flow statement. The same is true if the business buys or sells real estate or equipment.
- Financing activities: If a company issues new common stock, it is included in this part of the cash flow statement. Dividend payments are a common outflow in this section, as are stock buybacks. And if a company repays debt, that will appear as a line item here.