Financial Data of Each Company

Financial data of each company are recorded by accountants for various reasons. These specially trained people track, organize and record the financial dealings of an organization in order to inform the managers, investors, creditors, the IRS or any other interested parties about the current financial situation of a particular firm. All the information accountants gather are used to prepare documents referred to as financial statements. Although there is no consensus regarding which documents are financial statements and which aren't, there are several universally accepted papers - the income statement and the balance sheet are excellent examples. In addition, one could employ for instance a cash-flow statement or a statement of capital.

These documents help the reader get a clearer picture on the exact situation of a business and of the transactions or exchanges that keep the business alive. The sale of an asset (a product) or the use of a rented facility contribute to the better understanding of the general image.

The document referred to as the income statement is actually a summary flow report that contains the various revenues and expenses resulting from the business operations performed during a given period (usually one year). These revenues and expenses are categorized and there are several rules for presenting such a document, so all income statements end up looking very similar. The difference between revenues and expenses represents the net income (or net loss, obviously) of that company. The income statements are commonly referred to as the bottom line, so it is relatively easy to figure out their importance.

The income statement is also called the profit and loss statement and divulges the company's profitability, which reflects its particular performance, how much income may be transmitted to investors (as dividends) or how much can be reinvested into the company. There are various items that need to appear on the income statement. Each line tells the user how the company stands financially, depending on the method employed to calculate that item. Since it has been observed that companies tend to define in their own way certain transactions and since the industry wherein a company conducts its activity can have a profound impact on the items on the income statement, a set of standards has been imposed by law, in order to ensure that the income statements from different companies or years may be compared. These standards are known as the Generally Accepted Accounting Principles (GAAP) and are under a constant improvement process, aiming at protecting creditors, investors and other interested parties.

There are a number of essential elements that may be found on each and every income statement. The financial amount earned by a company through revenues and sales of its goods and/or services is referred to as 'Sales'. The amount of money a company has to pay in order to produce the goods or services sold is called 'Cost of Goods Sold' or COGS. This figure includes raw materials, manufacturing and labor, except salaries. Gross Profit is the difference between Sales and COGS. The idea is that the Cost of Goods Sold has to be maintained at a minimum, without sacrificing the quality of the goods / services offered.

The Gross Profit tells the reader how much the company has made from its core operations. The higher this figure is, the more money the company has available for reinvestment, research and development, marketing, expansion, other investments, and dividends paid to the shareholders. it's important to understand the source of the gross profit. A diminishing figure could be caused by poor management, which fails to take advantage of the opportunities on the market, or by a reduction in sales resulted from the oversupply. An increase of the Gross Profit is not necessarily the sign of better management, and could be traced to the seasonality of a product (Christmas trees are sold only before Christmas and never after).

Another important item is the one called General Operating Expenses. These include research and development, marketing, salaries, rents etc. These are the actual destinations of the revenues. However, only expenses incurred in the day-to-day operations fall under this category.

Depreciation, another item, is the annual amount deducted from tangible assets (machinery, vehicles etc.), and is a measure of the life span of that particular tangible asset. The usefulness of the machine decreases each year, so the company suffers a loss, since the current value of that asset is lower than its initial value. There are different methods of calculating depreciation, some of which are not accepted by fiscal authorities (depending on the applicable legal provisions).

By subtracting the general operating costs and the depreciation from the gross profit, the operating income is obtained. This is the income received from core operations minus the expenses incurred by day-to-day functions and the loss accumulated as a result of depreciation. This figure counts since it is important to know whether a company's working base is profitable. Low operating income raises questions, for instance, on whether excessive amounts are spent on salaries or marketing, or whether the equipment is not employed properly, resulting in a higher rate of depreciation than it is considered necessary.

Two other 'Income' items also appear on the Income Statement: 'Other Income' and 'Extraordinary Income'. These types of income follow the general rules provided for similar posts. The truly relevant items on a company's income statement come next. The Earnings Before Interest and Tax (EBIT) are the same as the operating income, provided that a company has no extraordinary incomes. EBIT is the measure of a company's ability to pay interest expenses, such as bank loans, by using the income recorded at the end of the year.

The interest expense is the amount the company has to pay to its creditors as interest. Creditors could be bondholders or banks. The difference between EBIT and the Interest Expense represents the Earnings. All companies have to pay income taxes, which are usually a percentage of the generated income, and are therefore variable. The profit remaining after income taxes have been paid, the Net Profit After Taxes, is the amount of money remaining after all other duties have been paid. Since this is what the shareholders receive as a result of a distribution, according to the number of shares each one holds, it is clear why it matters. However, this amount may also be reinvested for future growth.

Because of this difference, the Net Profit After Taxes is divided into two categories: the Dividends Paid to Shareholders and the Retained Earnings. If a company pays dividends, it is considered 'income-oriented', while if it doesn't, it's considered 'growth-oriented'. Certain equilibrium has to be maintained, so the net earnings are spent in the best possible way.

As a conclusion, an investor should identify the main source of a company's income and then analyze the financial health of a company.

The balance sheet, also referred to as a statement of financial position, reveals the company's assets, liabilities and owners' equity. Combined with the income statement, it makes up the foundation of a company's financial statements. The balance sheet is divided into two parts, based on the following equation: assets = liabilities + owners' equity. The means of production, the assets, are balanced by the company's financial obligations and the amount of capital it holds in order to finance its operations.

Assets are the objects a company uses in its production process. Liabilities are obligations to third parties that have to be honored, while the owners' equity or the shareholders' equity is the amount of money initially invested into the organization, to which any retained earnings are added. This amount is the source of the company's funding. A balance sheet is, just like the income statement, calculated for a specific time period (usually one day), and commonly written on the last day of the fiscal year.

There are several types of assets and liabilities. The assets that are included in the balance sheet are contained in three categories: current assets, fixed assets and intangible assets. Current assets (cash, cash equivalents, accounts receivable, inventory) are characterized by the fact that they have a life span of maximum one year and that they can easily be converted into cash (highly liquid). Fixed assets have a longer than a year life span. Tangible assets (which may be the object of depreciation) such as land, buildings, computers and machinery are fixed assets. Intangible assets include patents, copyrights or website domains. They lack a physical nature but their value is never to be underestimated, since they are often the most valuable assets a company has.

The other side of the balance sheet contains something called liabilities. This is the name under which the financial obligations of a company are known. They can be current and long-term, just as the assets. Long-term liabilities are those particular debts with a greater than a year maturity.

The owners' equity is the initial amount of money that the shareholders invest into a business. If the company decides to reinvest its net earnings (after taxes) into the company, the retained earnings will be restated from the income statement onto the balance sheet. By adding up the two figures one obtains the company's total net worth. The basic rule of a balance sheet is that the assets on one side have to add up to the same amount as the liabilities and the owners' equity combined, on the other side.