Interpreting Company Reports For Dummies

Ken Langdon, Alan Bonham, Lita Epstein

• Publisher: For Dummies
• Year: 2011
• Print ISBN: 9780470519066
• eBook ISBN: 9781119997870
• Edition: 1
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

Company financial reports are a key resource for investors, helping them uncover priceless information about a company's profitability, or lack thereof, from the figures as well as through other non-monetary indicators. Details of lawsuits, changes in accounting methods, liquidations, and mergers and acquisitions can all be ways of detecting red flags if you know where to look.

However the jargon and financial footnotes in financial reports can be difficult to decipher, and this For Dummies guide on the subject will help readers to understand company reports and make sensible investment choices based on publicly held information.

Taking you step-by-step through the finer points of financial reports, this straightforward guide will help you get to grips with the most accurate way to wade through the numbers, judge a company's performance, and make profitable investment decisions.

This UK Adaptation focuses on the UK financial market, with the FTSE index as the focus of the book.

Part I

Getting Down to Financial Reporting Basics

In this part . . .

If you’re a complete novice to the world of financial reports, this part gives you the background you need to understand this complex world, which has a language and rules of its own. In this part, we discuss the key types of financial reports, both internal and external, as well as what you should expect to find in those reports. We also explore different types of business structures and talk about the differences between a public and a private company. Finally, we review the accounting basics you need to understand in order to read financial reports.

Chapter 1

Discovering What Reports Reveal

In This Chapter

Reviewing the importance of financial reports

Exploring the different types of financial reporting

Discovering the key financial statements

F inancial reports give a snapshot of a company’s worth at the end of a particular period, as well as a view of the company’s operations and whether it made a profit. In the modern business world it’s unthinkable that public, and some would say private, limited companies do not give the public some way to gauge their financial performance. Many stakeholders depend on this information.

Right now, nothing could possibly replace financial reports. Nothing could be substituted that’d give investors, financial institutions, and government agencies the information they need to make decisions about a company. And without financial reports, the people who work for a company wouldn’t know how to make the company more efficient and profitable because they wouldn’t have a summary of its financial activities during previous business periods. These financial summaries help companies look at their successes and failures, and help them make plans for future improvements.

This chapter introduces you to the many facets of financial reports and how internal and external stakeholders use them to evaluate a company’s financial health.

Finding Out What Financial Reporting Is For

Financial reporting gives readers a summary of what happened in a company based purely on the numbers. The numbers that tell the tale include the following:

Assets: The cash, amounts receivable from customers, stock awaiting sale, investments, buildings, land, tools, equipment, vehicles, copyrights, patents, and any other items needed to run a business that the company owns or has the use of.

Liabilities: Money a company owes to outsiders, such as loans and unpaid bills.

Equity: Shareholders’ money invested in the company.

Sales: Products or services sold to customers.

Costs and expenses: Money spent to operate the business, such as money used for production, employee remuneration, and costs of operating the buildings and factories and supplies to run the offices.

Profit or loss: The amount by which the revenue from sales exceeds (or is less than) the costs and expenses.

Cash flow: The amount of money that flowed into and out of the business during the time period being reported.

Without financial reporting, nobody would have any idea where a company stands financially. Sure, the managers of the company would know how much money the company had in its bank accounts but even they wouldn’t know how much is still due to come in from customers, how much inventory is being held in the warehouse and on the shelf, how much the company owes, or what the company owns. As an investor, if you don’t know those details, you can’t make an objective decision about whether the company is making money and whether it’s worth investing in the future of the company.

Many people rely on the information companies present in financial reports. Here are some key groups of readers and why they need accurate information:

Executives and managers: They need information to know how well the company is doing financially and to get information about problem areas so they can make changes to improve the company’s performance.

Employees: Employees need to know how well they’re meeting or exceeding their goals and to know where they need to improve. For example, if a salesperson has to make £30,000 in sales every month, they need a financial report at the end of each month to gauge how well they did in meeting that goal. If they believe that they met their goal, but the financial report doesn’t show that they did, they’d have to provide details to defend their level of productivity. Most salespeople are paid according to the level of their sales. Without financial reports, there would be nothing to base their bonuses on.

Employees also make career and pension decisions based on financial reports released by the company. If a company’s financial reports are misleading or false, employees could lose most, if not all, of their pensions and their long-term financial futures could be at risk.

Creditors: Suppliers need to understand a company’s financial results to determine whether they should supply goods and services to the company. Banks and other lenders need to decide whether to risk lending more money to the company and to find out whether the company is meeting the minimum requirements of any existing loans. To find out how companies meet creditors’ requirements, see Chapters 9 and 12.

If a company’s financial reports are false or misleading, banks might lend money at an interest rate that doesn’t truly reflect the risks being taken. They could miss out on a better opportunity because they trusted the information released in the financial reports.

Investors: Investors need information to judge whether or not the company is a good investment. If investors think that a company is on a growth path because of the financial information it reports, but those reports turn out to be false, investors can make large losses. They may buy shares at inflated prices, risking the loss of capital as the truth comes out or missing out on better investment opportunities.

Government agencies: These agencies need to be sure that the company is complying with regulations. They also need to be sa...

Table of contents

• Title
• Contents
• Introduction
• Part I : Getting Down to Financial Reporting Basics
• Part II : Understanding Published Information: Annual Reports
• Part III : Analysing the Numbers
• Part IV : Understanding How Companies Optimise Operations
• Part V : The Many Ways Companies Answer to Stakeholders
• Part VI : The Part of Tens
• Part VII : Appendixes
• : Further Reading