Financial Statements - How to Read an Annual Report  

Stock value is derived from a company's long term ability to create cash profits from invested capital; and financial statements are intended to give a snapshot of how successfully this creation of value is being accomplished. But unless you're a professional accountant, you may find that a look at an annual report is like a visit to an alien planet; you'll encounter odd terminology, strange calculations, and of course big numbers.

This guide should help make things more accessible. It explains the three important financial statements from the annual report of a fictitious company:

Income Statement How good the company is at making money
Cash Flow Statement How they're paying for their operations and their future growth
Balance Sheet What the company owns and owes

But first, here's an interactive diagram of the big picture that the annual report is trying to convey. Arrows indicate the movement of cash. Click on any hot zone; information will appear below the diagram.

Article Contents
Introduction / Diagram
Income Statement
Cash Flow Statement
Balance Sheet
Books & Links


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