95% of investors, or my clients, shun financial statements like some kind of poison.
The truth is successful investment cant run away from Financial Statements. As Warren Buffet puts it, accounting is the language of business, presented in the form of Financial Statements. They are important documents that communicate to us investors, how well the business is doing.
This is also known as Profit and Loss Statement (P&L).
For those companies which require much raw materials in for goods production, the raw material cost would usually be grouped under Cost of Goods Sold. These are the expenses most directly related to production.
Think of it as a report documenting all the items in your home after a huge spring-cleaning. These items can be self-owned, or borrowed from friends.
Now apply this idea to a company. Similarly, Balance Sheet represents what the company owns and owes.
The gist of Balance Sheet is that Assets equal Equity plus Liability which is Accounting 101. It would be helpful if we think about these from the perspective of company.
As a company, you would have two sources/forms of funding to purchase all the required materials and equipment to start operation. You can either get loans from bank, or seek funding from shareholders which include individuals or other entities.
All the items bought using bank loans are liability, because technically the company does not own them. The bank does.
All items bought using shareholders' money are equity, owned by shareholders.
Putting both together, all things are assets that the company can make use of to get its business running. Thats the reason Assets always equal to Equity plus Liability - either purchased using bank loan or shareholders' money.
There are many other reasons but they are not within the scope of this article. And I would not want to bore readers with accounting terms.
So the cashflow statement aims to provide a more accurate picture to the health of a company, from the cashflow perspective. After all, cash is king.
There are other parts such as Net Cashflow from Investing and Financing. Lets leave them for future pieces when we delve deep into each statements.