4 Keys to Reading a Bank Financial Statement

Many people are confused by the information contained in a bank financial statement from their banks. This should not frighten you. If you can be able to decipher what is on a nutrition label or even tell a baseball score, then reading and understanding your bank financial statement should not be a problem. Basic accounting can be equated to applying for a loan or following a recipe.

1. Types of financial statements

There are four main types of financial statements - cash flow, shareholder’s equity, income, and balance.

Balance sheets show what the company owes, and what it owns at a particular time. Income statements are made out to show what the company made in a certain time period, and what it spent over the same time period. Cash flow statements depict money exchange between the company and the outside world over a given period of time. The statement of shareholder’s equity depicts the way the shareholder’s interests have changed over a given time period.

2. Balance Sheets

Balance Sheets show information pertaining to the company’s shareholder’s equity, assets, and liabilities. Assets refer to the stuff that a company owns and which actually have a value. This could be physical property (trucks, plants, equipment) or non physical stuff such as trademarks and patents. Liabilities refer to the actual amount of money that the company owes to other people. The shareholder’s equity refers to the company’s capital or net worth. The shareholders are actually the owners of the company.

3. Income Statements

It shows the company’s revenue over a given period of time. Also, it shows clearly the costs incurred during the earning of that revenue. Besides, it shows the company’s earnings per share. This is what the shareholders would get if the company gave each equal portions of the company’s net worth.

The top of the income statement shows how much the company made from the sale of products and services. This is the gross income.

4. Cash Flow Statements

They show the company’s outflows and inflows of money. This is of great importance because the company will need money with which to buy assets and pay off expenses. The bottom line on a cash flow statement depicts the company’s decrease or increase in cash. The money could come from financial, investing, or operational activities of the company.

Note that when you are going through the bank financial statement, it is important to read all the footnotes carefully. Not only for bank financial statements, but also for all legal statements such as contracts.

The footnotes on a bank financial statement show the tax information for the company. The information is broken down for you by type. There’s state, federal, local and also foreign tax details. The same footnotes contain information on the company’s stock options, and any of the major changes in practices and policies in the company.

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