Financial Reports

Financial reports can provide a wealth of information for investors, managers, analysts, and tax accountants alike. Financial statements provide a summary of a company’s financial operations and give direction on where the company is going.

Financial reports contain a plethora of information.

Financial Reports are Required by Law

Two things are permanent, death and taxes. Since we pay taxes, we need financial reports to calculate earnings. If a company is publicly traded, the Security Exchange Commission (SEC) requires that financial reports be filed in accordance to Generally Accepted Accounting Principals (GAAP) for a few reasons.

• Public Information – Allows the public to use the company’s financial reports for valuation, analysis, and investing.
• Taxes – Reports are used to calculate earnings in determining the amount owed to the government for taxes.
• Business Ethics – They are important for all information to be made public to increase investor confidence and avoid the temptation of financial shenanigans.

The Big Three

There are three main types of financial statements: balance sheet, income statement, and cash flow statement.

• The balance sheet provides a snapshot of a firm’s financial condition. It entails a listing of assets that are balanced against a firm’s liabilities and owner’s equity.
• The income statement provides an overview of the firm’s performance and determines the company’s earnings for a particular accounting period. It reports profits based on revenues and the costs to provide those revenues, including taxes.
• The statement of cash flows reports a company’s usage of cash. Cash inflows and outflows used for investing, operations, and financing are tracked to determine a firm’s liquidity.

Other Valuable Financial Reports

While the major financial reports provide most of a firm’s fiscal information, there are other statements that are quite useful.

• Sales Reports – An analysis of sales information can determine trends and the ability of a company to generate revenues.
• The statement of stockholder’s equity lets investors view the decisions owners make about the investment in their own company. It is a strong indicator of confidence.
• Financial Statements Footnotes – Read the small print. Footnotes contain valuable bits of information about the how and why behind calculations on financial reports. The math is only half of the battle, knowing where the math derives from is the other half.

Avoiding Financial Shenanigans

Business ethics has been a hot topic lately, especially with companies like Enron making headlines. The SEC has cracked down by passing laws such as the Sarbanes Oxley Act to prevent a violation of investors’ rights. There are many financial reports that can be reviewed to determine if a company is “playing reindeer games”.

• Form 10-K is a detailed annual financial report checked by and independent auditor.
• Proxy Statement is a mailed report that contains proposals to be voted on by shareholders, changes in management compensation, and other board information.
• Form 10-Q is not as detailed as the 10-K nor is it audited, but it is required by law for publicly traded companies to file a Form 10-Q quarterly and contains pertinent financial information.
• Form 144 is a notification sent to the SEC if insiders or owners are buying or selling the company’s stock.
• Form 8-K is filed with the SEC whenever there are any major changes in the board, company control, auditor change, or other major event.

In Conclusion

These are just a few examples of the many financial reports at your disposal. So, the next time you receive Annual Finance Reports in the mail from your investments, realize they contain information you can use for your own analysis.

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