Fundamental side: What are FINANCIAL STATEMENTS?


I have been saying so many things about stocks, analysis, and some weird words that you might have just known through me or probably through the newspaper(again if you want to learn about stock investing our suggestion is for you to read the Business section of the newspaper)

Back in the forum I regularly contribute to we termed these infusion of new and out of the ordinary words as “nosebleed” because by the  time you finished reading it your head starts spinning, your eyes go from left to right and back ten more times and when you can’t handle it anymore specially the “English”(that is how we termed it when an ordinary not so “sosyal” guys like us can’t keep up with one’s English) your nose as a figure of speech will bleed thus the term “nosebleed.”

And here I am giving you a new word along with my word of the day post, FINANCIAL STATEMENTS or better known as FS.

What are they anyway?

What? “THEY” meaning not only one but many?

Yup Financial Statements is a collective term for financial reports and schedules that relay the company’s financial and some non-financial information. There is a lot of this reports and schedules but as a rule they are contained into 4 separate reports. Basically these are the condensed form of the transaction of the entire company. Being an accountant I already got used to the volume of transactions  a company makes in a year and to have it in one year is really a “nosebleed” that is why we have Financial reports which turns a volume of a year work into 4 - 10 sheets of reports and if you need a guide in deciphering such about another 20-1000 pages of notes.

This is just an introduction of a number of series of post about Financial statements. Again you might ask me “is this necessary in my stock investing?” Well if you want to know what is the company’s financial health as a value investor then you need to learn this stuff. I know it is a “nosebleed” but this is one of Warren Buffett’s  ways how he earned billions.

Now let us get you acquainted with the 4 Basic Financial Reports and The Notes to Financial Statements

This is also known as statement of financial position(due to the new accounting rules the entire world is following, the IFRS). What does this report tell you? It tells us about the financial condition of the company at a given time that is why some will say this phrase when presenting this report ” as of December 20XX.”

It tells us how much money the company has, the receivables they have, the properties they have, the other investments they have, the current liabilities they have, the long term debts they have, and the capital or equity they have. Now why do you need these information? These info will help you determined if the company can still go on business for the next coming years, if the the company has enough to sustain its expansion projects and if it is able to pay off its debts and pay you, the investor, dividends. 

This too has other aliases like Income Statement, Statement of Performance(again IFRS), Earnings or Loss Statement, Operating Statement and others. This report particularly gives us one important info, that is the company’s capability to generate profit for a period of time thus you will hear this phrase when this report is presented “for the period ending December 20XX.” 

Some termed this profit as bottom line, results of operation, net income, and others. But this report tells us more. It also tells us where did the company get its earnings(for those that have segment reporting), how much have they spent to operate( by looking at the details of the operating expenses), and sometimes details on transaction that are not part of the operating cycle that affects the profitability of the company like extra ordinary loss brought about by disasters, financial loss from investments that the company place extra funds, and others.

3. Statement of Cashflow

This statement details how the company used/generated its cash and how the company arrived at an ending cash in the balance sheet. basically it is divided into three sections: Cash generated/use in operating activities, Cash generated/use in investing activities, and Cash generated/use in financing activities.

4. Statement of Changes in Equity

Also known as Statement of Retained Earnings, it details the changes in the Equity section of the company just like the Statement of Cashflow. It details the changes in the number of stocks, the changes in the amount of invested capital, the changes brought about by dividends, additional income/loss as forwarded from the profit and loss thus increasing or decreasing the companies Retained earnings(Surplus) or Deficit, and other changes brought about by changes in the equity.
5. Notes to Financial Statements 

Again this is an additional to the above statements that will help you decipher the different total amounts presented in the reports. It could be from 1 page to more than 1,000 pages depending on the complexity of the company. These notes may include discussions on how the company did there operations, other investment ventures, some recognition principles adopted per the current accounting standards, some notes on judicial proceedings of the company and the likelihood of such, and other notes that the company may deem appropriate to help investors like you and me make a decision to invest in their company.

I guess this introduction got quite long, I would from time to time discuss one of this in a separate post so that you have a clear idea about these and at the same time explain the concept so that you wont be putting too much time in learning these statements. Once you get the idea behind it it would be easy for you to analyze these financial information.

Also if you need such statements for the listed companies in the Philippine Stock Exchange you visit their website and look for the company and you can find their latest filed reports under the Corporate Information link.  

Financial Freedom Advocate About the blogger

Louis Delos Angeles is a Certified Public Accountant, blogger behind Investing in Philippines, and author of Investing in Stocks: Preparing for the future small amount at a time. Learn more about Louis and his financial freedom advocacy here.

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