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Thursday, June 4, 2009

Financial Statements Explained

From The Hoss's Mouth

The technical definition of a financial statement goes something like this, depending on which dictionary you use: a written report that quantitatively summarizes the financial status of an individual or organization for a stated period of time.

Why is a financial statement important to the potential investor? It shows you where a company's money came from, where it went, where it is likely to go, and where it is now.

These are statistics any wise investor must know and understand before purchasing stock in a company or even buying a company outright. It is similar to a racing form, which gives the handicapper important information on all horses running in a race and enables him/her to make a selection based on the criteria s/he deems important.

In short, a financial statement enables you to analyze the financial health of any company you are considering for investment purposes and consists of four main parts.

  1. Balance Sheet: Shows at a fixed point in time what a company owns and what a company owes.
  2. Income Statements: These show how much money a company made and how much it spent over a certain period of time.
  3. Cash flow Statement: A summary of cash inflows and cash outflows during an accounting period.
  4. Statement of Shareholders' Equity: Shows what money would be left for the shareholders if a company sold off all its assets and paid off all its liabilities.
financial statement
The Hoss, in the next several postings, will review in detail each of the main parts of a financial statement. He hopes that once you have read all the information you will have a good understanding of the components of a financial statement and be in a position to make wise investment choices.

Stay on track,

The Hoss

Next Hoss Cents Free Financial Money Magazine Post: The Balance Sheet
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