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Michael Olafusi

Making Sense Of Financial Statements

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(Originally posted: 12/10/2013)

I'll be introducing you to Financial Statements. Helping you to make sense of them.



Unlike in the US where the Annual Reports and Financial Statements (10K) are separate documents, in Nigeria the Financial Statements are embedded in the Annual Reports. So, you're better of googling for Annual Reports rather than Financial Statements of companies listed on the NSE.

The difference is that Annual Reports start with a colorful introduction to the company, the list of the BoDs, BoD Chairman's report and CEO's report. While the Financial Statements go straight to the numbers.

And in this post, we'll also go straight to the numbers.

A Financial Statement comprises 5 major parts:

Income Statement
Balance Sheet
Cash Flow Statement
Statements of Shareholders' Equity, and

Income Statements
The Income statement is the most popular of all the 5. In fact, most of the stock analyses you'll see are focused on this part of the financial statement.

The Income Statement is simply the company's profit and loss statement. It shows the company's revenue and expenses over the reporting period.

It provides the following financial data -
1. Revenue
2. Cost of Goods
3. Gross Profit Margin
4. Operating Expenses
5. Total Expenses
6. Net Profit
7. Depreciation, Depletion, Amortization
8. Earnings Before Interest and Tax (EBIT)
9. Interest
10. Taxes
11. Net Profit after Taxes

Don't worry about what they mean. In subsequent posts, I will explain each single one of them, how they are calculated and their significance.

Balance Sheet
The Balance sheet is the part of the financial report that lists the company's assets, liabilities, and equity at the end of the reporting period. 

It provides the following financial data -
1. Current Assets
2. Current Liabilities
3. Long-term Assets
4. Long-term Liabilities
5. Equity

Cash Flow Statement
This part of the Financial Statement shows the flow of cash in the company. It has the record of the cash transactions that happened during the reporting period. And is the best way to know if a company is generating cash or just revenue numbers.

It reports -
1. Cash at the start of the reporting period
2. Cash at the end of the reporting period
3. Cash from Operating Activities
4. Cash from Investing Activities
5. Cash from Financing Activities

Often titled as Notes to the Financial Statements, it's the most educative part of the Financial Report and often takes up two-third of the entire Financial Statements.

It will inform you about -
1. The company's principal activities
2. Report of operations of company's business units (segmented reports)
3. Assumptions made in the preparation of the other reports
4. Pending legal issues that might affect the Shareholders
5. Changes in the reporting format since the last report. (This year most Nigerian companies switched completely from the GAAP standard to the IFRS standard. A lot of reclassification of financial items was done.)
6. Reports on financial activities of subsidiaries.

We have come to the end.

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