How to Use Financial Statements

Whether a person is running a business or investing in that business it is imperative that he or she know how to use financial statements. Financial statements are essential to understand how the company allocates it resources and if this allocation method is successful. Financial statements are also an excellent way to compare the asset performance of one company to another.

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Instructions

- 1
  
  Identify the sector type of the company that issues the financial statement. In order to have a basis of comparison to use the financial statement, you first need to understand the industry in which the company operates.
- 2
  
  Understand the common kinds of financial statements. The balance sheet lists the amount of resources a company has and the claims others have on those resources. The income statement is essentially the stated profitability of the entity. These are the two most common financial statements, but you can also have the statement of changes financial position and the state of retained earnings.
- 3
  
  Compare one year's financial statements to another year. This comparison can demonstrate the financial trends for the company. If the profitability listed on the financial statement is increasing, the company is in good fiscal condition. However if the financial statements show a downward trend, it can be a signal that changes in the company need to be made to reverse the negative trend.
- 4
  
  Contrast the financial statement of one company with the statements of another. In order for this comparison to be valid, the companies need to be in the same industry and relatively the same size concerning capital investment.
- 5
  
  Use ratio analysis to compare the financial statements of companies of different sizes and in different industries. Ratio analysis makes the size of the company irrelevant as it is measure how the company manages it capital regardless of size. Examples of financial ratio are current, acid test, earnings per share, return on assets, debt to asset and profit margin. These are the main comparison tools used to evaluate financial statements.

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How to Use Financial Statements

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