Understanding some of the basic accounting principles is not only needed for accountants – every investor needs some important accounting information to assist in the share purchase process. The balance sheet shows a given financial condition for a given day. This snapshot shows what the assets, liabilities, and net worth of the company (assets and liabilities are minus liabilities). (Net assets reflected in the balance sheet as shareholders' equity or net asset value (NAV).)
The balance alone provides limited information and should therefore be compared to the company's previous results. To address the company's financial potential, ask at least the following four basic questions:
o Has the value of the company's assets increased six years ago, two years ago or two years ago? By comparing the current asset base over the past two financial years, you can see whether a company is growing in both their size and financial strength.
o How do individual items compare to previous periods? Particular attention should be given to the expansion of lines, such as claims, which ensure the good handling of debtors.
o Look at the obligations and ask how they grow (especially debt and accounts) over assets. The company may also experience a cash crisis when the payable accounts grow faster than for a certain time. Debt that grows faster than the items on the other side of the balance sheet may be the red banner of financial problems that can be expected.
o Is the company's NAV or shareholders' equity (equity) higher than the previous year? In a financially healthy company, NAV will grow as earnings grow. The profit and loss account is intended for the company's profit (or income, net income or bottom line) for the entire accounting period. Gain is simply a waste of money when all the costs (including operating costs, interest payments and taxes) have been deducted from the sale.
Investors should always compare this year's earnings compared to last year. Strong Companies Must Show Consistent Profit Growth Over Time
Investors should ask the following questions when looking at the company's income statement:
o Increase in operating revenue? Operational Revenues are the bottom line of the company's core business. In other words, make sure that the most important factor in a company's profits is "real business" and not non-repetitive items such as profits from the sale of assets
o Growth in sales and why?
is growing at a reasonable price? Pay attention to one-off charges (for example, a big one
Bad Debt Description and Determination of Meaning)
o Is the Company's tax base compliant with the corporate tax rate (30%) or inflation inflated by past tax losses  If only one financial statement you need to be a cash flow statement because it shows how you handle your company's resources. A company can be profitable, even if its resources are badly handled – for example, if you do not collect your claims, you will not be able to pay your bills and be forced to charge.
Cash The flow statement includes all revenue and cash payments. This consists of three main parts: cash flow from operating activities, cash flow from investment activities and cash flow from financing activities. Shows how the balance sheet lines changed over the accounting period
Cash flow from operating activities is arguably the most important part because it shows the underlying cash performance of a company's operations. A consistent negative operating cash flow can warn you of future financial problems.
Funds from investment activities present money invested by investors, including capital expenditure and acquisition. At this stage, cash receipts from the sale of assets are also reflected. Investors have to make sure that the company invests appropriately in maintaining its production capacity – in other words, not artificially increasing profits at the expense of its future earnings. A quick and easy way to verify that capital costs have reached depreciation for at least a number of years.
Cash flow from financing activities reflects capital-like cash flows, including capital injections, debt recovery and debt repayment.
These three financial statements are not all. Investors can obtain important additional information about both value-added reporting and equity change reporting. Do not forget to read the notes to the financial statements if it is even more important than the financial statement itself. The notes include the small prints required to evaluate the balance sheet, profit and loss account and cash flow statement.
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