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Understanding financial statements from two different angles

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Marketopedia / Fundamental Analysis / Understanding financial statements from two different angles

Overview of the financial statements

There can be 2 different perspectives from which you can look at financial statements: 

  1. From the maker’s perspective
  2. From the user’s perspective

A maker of financial statements usually has an accounting background. This entails creating ledger entries, confirming bills and receipts, contrasting inflows and outflows, auditing etc. The ultimate aim is to generate an accurate depiction of the company’s assets and liabilities. To achieve this, specific capabilities are a must, which is acquired by completing a Chartered Accountant’s course.

The person is not required to understand the particulars of journal entries or audit processes. All they need is to be able to interpret the financial reports that have been compiled. This data can then be used for making decisions.

To clarify, consider Google as an example. Although the average person may not be able to decipher the intricate search engine algorithm that makes it run, we all have no difficulty using it. The same goes for financial statements; even if you’re not the one making them, you can still effectively utilise them.

A common misconception among market participants is that they must know financial statement concepts to be successful fundamental analysts. Although this can be beneficial, it is not essential. The key to success in this field lies in the ability to use and interpret financial information rather than create it.

A company typically displays three primary financial statements to demonstrate its performance.

  1. The Profit and Loss statement
  2. The Balance Sheet
  3. The Cash flow statement

In the next few chapters, we will get an understanding of these statements from a user’s standpoint

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