Simple Guide to Reading Financial Statements

How to read Financial Statements
Simple Guide to Reading Financial Statements


Financial statements are written documents that convey the financial position of a company. Understanding financial statements is an essential skill for any company stakeholder. It assists the stakeholders with data-driven decision-making and mitigates risk. This simple guide will empower you to understand financial statements and make successful decisions.


Types of Financial Statements

Balance Sheet

The balance sheet provides an overview of the company’s assets, liabilities, and equity at a specific point in time. It shows what the business owns and what is owed to the business using these components.


Income Statement

The income statement outlines the profitability and operational performance of the company. It provides a profit or loss figure for the company by summarizing the revenue earned and the expenses incurred.


Cash Flow Statement

A cash flow statement highlights the amount of cash leaving and entering a company. It details operational, investment, and financing activities. Furthermore, it provides insight into fulfilling financial obligations such as debts and expenses.


Understanding the Balance Sheet


Assets are a valuable possession owned or controlled by a company. Assets that cannot be converted into cash within a year are known as non-current assets, whereas assets that can be converted are known as current assets. Identifying the composition of assets is essential to assess the company’s liquidity.



Liabilities are possessions owed by the company. Non-current liabilities mature beyond a year, while current liabilities are due within a year. They aid in assessing the risk profile and the company’s debt management ability.



Equity is derived by subtracting a company’s liabilities from its assets. It represents the book value of a company. It assists in assessing the company’s net worth and the portion its investors own.


Analyzing the Income Statement


Revenue represents a company’s income by carrying out its primary activities, such as trading.


Cost of Goods Sold

The cost of goods sold represents the direct costs incurred to carry out the primary activity of the business. The difference between revenue and cost of goods sold is the gross profit.


Expenses are the various indirect costs incurred to run a company. These costs include operational, administrative, and financial expenditures.

Net Income or Loss

Net income or loss is the final figure on the income statement. It is the difference between the gross profit and expenses. A net loss occurs when expenses exceed gross profit, whereas a net profit occurs when gross profit exceeds expenses.

Decoding the Cash Flow Statement

Operating Activities

Operating activities on cash flow indicate the cash flows from the company’s business activities. Revenue receipts and rent payments are a few examples.

Investing Activities

Investing activities indicate cash flow from a company’s investments. A few examples are purchasing, Sales of fixed assets, and business acquisition costs.

Financing Activities

Financing activities include cash flows related to raising capital. It includes cash from shareholder investments and payments such as dividends in return for the investment to the shareholders.


Stakeholders should always consult Financial statements before deciding on the company. Deciphering these financial statements is essential for making the right decision. With this guide, you can make data-driven decisions using financial statements.