Ten Items to look for in an organizations’ Financial Statements

There are four main statements:

Balance sheet, Income statement, statement of cash position and statement of equity.

A Balance sheet demonstrates what a company owns and what is owed as of a specific date in time. Assets (Property, equipment, inventory, cash), Liabilities (money or property owed) and Equity (Value of the company) are included on a balance sheet. The Assets must always equal the liabilities + the equity.

       1)       What is their current cash balance? Has it changed drastically since the previous period or since the end of their last fiscal year?

     2)     How much liability does the company have? Is it short-term (which will be paid within a year) or long term? Too much of either does not demonstrate a financially stable organization.

The Income Statement shows revenue earned over a specific period (perhaps a month or a year) and the expenses associated with earning that revenue.

3)      Compare budget to actual numbers? If there is a large variance in either direction, there may be a reporting problem.

4)      Is the bottom line a negative number? If so, expenses are exceeding revenue. If this happens on a consistent basis, the company is losing money and this is a problem.

Cash flow statements report the inflows and outflows of cash. While it is important to read the income statement to know whether or not a company made a profit; the cash flow statement will demonstrate whether the company generated any cash. Cash flow statements are divided into; operating activities, investing activities and financing activities.

5)      The bottom line shows the increase or decrease in cash for a given period.

6)      Operating activities are based on the amount of cash the company generated from sales less cash used from the activities.

7)      Investing activities include all investments as well as purchases or sales of property, plant and equipment.

8)      Financing activities include cash received from loans or selling stock and cash paid out on loans would reduce the amount of cash.

9)      Read the footnotes to the financial statement. There are times when the footnotes will offer more information than the statements themselves. A key piece of information available in the footnotes may be income taxes paid, pension or retirement plans, and the amount of stock options executives or employees hold.

10)   How much working capital does the organization have? Subtract current liabilities from current assets.  If the two are very close the organization may not be financially stable.