Analyzing Financial Statements to Make Investment Decisions

Identify the five main accounts—assets, liabilities, shareholders’ equity, revenues, and expenses—and understand how future benefits, obligations, net worth, and earned income drive financial statements.

Recognize assets as resources owned that provide future economic benefits to pay expenses and generate revenues. Explore cash, inventory, land, equipment, and patents as core asset examples.

Define liability as a future obligation from past transactions, representing a creditor's claim on assets to be settled by payments or delivered goods, such as accounts payable and unearned revenue.

Explore shareholder's equity as the residual claim on assets after liabilities, covering common and preferred shares, debt vs equity financing, and retained earnings beginning balance plus net income minus dividends.

Compare debt financing and equity financing, including common and preferred shares, with emphasis on dividends, voting rights, ownership, and retained earnings, illustrated by a water bottles business.

Explore how net income, equal to revenues minus expenses, fuels retained earnings, a key shareholders' equity account, and how ending balance comes from beginning plus net income minus dividends.

Explore revenues in detail, including sales, service revenue, and interest revenue, and learn how revenue is earned and recognized when cash or accounts receivable arise.

Explore how expenses, such as cost of goods sold, depreciation, income tax, and selling and administrative costs, relate to revenues to determine net income on the income statement.

Analyze the income statement in detail, learning how revenues minus expenses yield net income or loss, with a single-step example and emphasis on formatting and account structure.

Learn how the statement of changes in equity tracks share capital and retained earnings, including issuances, repurchases, net income, and dividends, with a practical October 31, 2018 example.

Explore the statement of retained earnings as part of the statement of changes in equity, detailing the beginning balance, net income, dividends declared, and ending retained earnings.

Master the balance sheet, or statement of financial position, by identifying assets, liabilities, and shareholders equity. Apply the assets equals liabilities plus shareholders equity equation and note the order of liquidity.

Explore the main accounting equation—assets equal liabilities plus shareholders equity—and see how balance holds across statements, with a practical example of 50,000 assets, 20,000 liabilities, and 30,000 equity.

Explore the statement of cash flows and its three activity sections—operating, investing, and financing—to understand cash movements, reconcile beginning and ending cash, and assess funding and investment decisions.

Explore how the four financial statements interrelate, with net income from the income statement reported in the statement of changes in equity and cash flows linking to the financial position.

Walks through preparing the income statement, statement of changes in equity, and balance sheet for a month, illustrating net income, dividends, and the assets equal liabilities plus equity.

Explore the multiple-step income statement, tracking net sales, gross profit, income from operations, income before tax, and net income, with contra accounts and other revenues and expenses.

Analyze a multiple-step income statement by calculating net sales from sales and contra accounts, determining gross profit, operating and other expenses, and net income through a step-by-step solution.

Learn how the classified balance sheet groups assets into current assets, long-term investments, property, plant and equipment, intangible assets, and goodwill, and how liabilities and equity are organized.

Analyze current assets and the operating cycle, emphasizing liquidity and the order of liquidity from cash to prepaid expenses. Examine prepaid expenses as assets for future benefits.

Explore non-current assets, those not expected to be converted to cash within one year, with a focus on long term investments, property, plant and equipment, intangible assets, and goodwill.

Explore long term investments as multi-year assets in debt securities and equity securities, including loans, notes, bonds, mortgages, and shares in other companies, not typically sold within one year.

Explore property, plant and equipment as tangible assets, including land and buildings, their depreciation under IFRS, and how accumulated depreciation determines carrying amount.

Analyze intangible assets such as patents, copyrights, trademarks, and licenses, and explain goodwill as the premium paid for acquiring a business, which generates future value, with amortization for finite lives.

Current liabilities are obligations due within one year, such as accounts payable and unearned revenue, plus current maturities of long-term debt, illustrating future obligations and the one-year cutoff.

Explore non-current liabilities like long-term debts, lease obligations, pension and benefit obligations, and deferred income tax liabilities, and understand how notes to the financial statements detail these future obligations.

Explore shareholder's equity by examining share capital and retained earnings, defining share capital as preferred or common shares, and applying the retained earnings formula to track net income minus dividends.

Explore a classified balance sheet that organizes assets into current assets, long-term investments, property, plant and equipment, and goodwill, then compute carrying amounts and balance with liabilities and shareholders' equity.

Practice step-by-step construction of a classified balance sheet for Batra Corporation, using current assets, property, plant and equipment, liabilities, and shareholders' equity from the income statement and equity changes.

Learn how to analyze financial statements using horizontal, vertical, and ratio analyses to enable apples-to-apples comparisons between companies and inform investing decisions.

Master horizontal (trend) analysis by calculating base-period and analysis-period percentage changes in net sales, using base-period amounts and analysis-period amounts to assess growth.

Master horizontal analysis by calculating base-year percentages and year-to-year changes on the balance sheet, interpreting cash, accounts receivable, inventory, and property, plant and equipment trends for investment decisions.

Learn vertical analysis, or common size analysis, expressing each balance sheet item as a percentage of total assets or each income statement item as a percentage of net sales.

Perform vertical analysis on Jti Inc's income statement using net sales as base to compare 2014 and 2015 cost of goods sold, gross profit, and operating expenses, identifying red flags.

Analyze financial statements through three ratio categories: liquidity, solvency, and profitability. Liquidity ratios gauge short-term payment ability; solvency assesses long-term survival; profitability links income statement with balance sheet data.

Analyze liquidity ratios, focusing on working capital and current ratio, to assess short-term debt paying ability, then examine receivables turnover, average collection period, inventory turnover, and days in inventory.

Compute liquidity ratios from partial balance sheet data to assess working capital, current ratio, receivables turnover, average collection period, and inventory turnover.

analyze solvency ratios that gauge debt levels and interest coverage, including debt-to-total-assets and times interest earned, using EBIT to measure ability to cover interest.

Practice question on solvency ratios uses 2014 and 2015 data to compute debt to total assets and times interest earned, showing 2015 worse on debt but stronger interest coverage.

Analyze profitability ratios, including gross profit margin, profit margin, asset turnover, return on assets, return on common shareholders' equity, earnings per share, and payout ratio, and compare with prior years.

Practice calculating profitability ratios, including gross profit margin, profit margin, asset turnover, return on assets, and return on common shareholders equity, from 2014 and 2015 data with no preferred shares.

Analyze the financial statements of Microsoft Corporation and Apple Inc by locating annual reports and applying horizontal, vertical, and ratio analysis to assess financial strength and investment viability.

Learn to download Microsoft's 2023 annual report, locate financial statements, and perform liquidity and profitability analysis using current ratio, debt to assets, times interest earned, margins, and earnings per share.

Analyze Apple's 2023 financial statements to inform investment decisions using horizontal, vertical, and ratio analysis, including income statement, balance sheet, cash flows, dividends, and marketable securities.

Continue your journey in analyzing financial statements to make investment decisions by exploring more accounting and finance insights, unlocking your potential and expanding your expertise in future courses.