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Introduction to Analysis of Financial Statements

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Financial statements enable investors to analyze a company’s ﬁ nancial strength and performance.

The income statement measures a period of time, whereas the balance sheet is a snapshot of a single day.

All three statements are interlinked, with changes to one ultimately affecting the other two.

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The Income Statement: From Net Revenue to Net Income

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The income statement shows the revenues, expenses and income recognized over a period of time.

Companies use accrual accounting to show when revenues and expenses occured, as opposed to when is transferred.

Gross and operating margins can help reveal important trends about how a company is performing.

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The Balance Sheet: Assets, Debts and Equity

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The balance sheet lists all of a company’s assets and liabilities at a certain point in time.

The proportion of cash, receivables, ﬁxed assets and debt varies by industry.

Changes in accounts receivables and accounts payables can provide warning signs about a company or its customers

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The Cash Flow Statement: Tracing the Sources and Uses of Cash

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The cash ﬂow statement is a link between the balance sheet and the income statement.

Though a positive change in cash is good, what really matters is how the cash was increased and spent.

Free cash ﬂow measures how much cash was generated that can be spent at management’s discretion

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