What Are the Most Important Items in a Financial Statement?
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By Sean Ryan, CFA
Each financial statement serves a particular purpose, and each one contains some items that are especially important. The two main financial statements are the Balance Sheet, and the Income Statement.
The Balance Sheet tells you what a company owns, and how much money it owes to others. When examining a balance sheet, the three most important items are “Total Assets,” “Total Liabilities,” and “Shareholders’ Equity.” A quick summary:
Total Assets: This is the total value of everything a company owns, from factories and trucks, to inventory, right down to the pens and pencils in employees’ desks.
Total Liabilities: This is the total amount of money that the company owes to other people (or companies). Loans owed to the bank, bonds issued to investors, payments owed to suppliers, and taxes owed to the government are all liabilities that show up here.
Shareholders’ Equity: Take everything the company owns (Total Assets), subtract everything the company owes to others (Total Liabilities), and what’s left over is shareholders’ equity – the value of the owners’ stake in the company.
The income statement tells you how much money a company has coming in, how much is going out, and how much (if any) is left over. When examining an income statement, the three most important items are “Total Revenues,” “Total Expenses,” and “Net Income.” A quick summary:
Total Revenues: This is all the money the company receives in exchange for the goods or services it sells to customers. When a company sells a widget for a dollar, that dollar is revenue.
Total Expenses: This is all the money the company spends to produce and sell its goods and services. The costs of raw materials, employees’ wages, rent and other costs all show up here.
Net Income: This is a company’s profit. It is how much of their revenues are left after paying all their expenses, and paying taxes to the government. It is how much a company has left to reinvest in the company, or return to the owners through dividends or stock buybacks.
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