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Financial Literacy: Reading A Financial Statement

Last week, we discussed reading your credit card statement. April is Financial Literacy Month and reading financial documents sometimes requires more than knowing how to read. There will be words on the page that you recognize but you may not be able to comprehend what they mean for your investment planning.

In “12 Things You Need to Know About Financial StatementsInvestopedia offers a primer on what you’ll find in your financial statements. Investing is just the beginning; you need to keep up with your investments.

An important point made in the Investopedia article is that “Financial Statements Are Scorecards.” And to read this scorecard you must understand things like profits and return on equity. Those are just two of the many terms you all find in a financial statement. Since these statements are not standardized, it is up to you to research the terms that you don’t know. And this goes back to the first point: if a financial statement is a scorecard, it may be designed in such a way that “wins” are made obvious but any missteps or defeats are not as easy to read or understand. Investopedia also notes that accounting is more art that science.

The University of Georgia offers a document called “How to Read a Financial Statement” that includes this warning “Watch Those Footnotes”:

“The annual reports of many companies contain this statement: “The accompanying footnotes are an integral part of the fina[n]cial statements.” The reason is that the fina[n]cial reports themselves are kept concise and condensed. Therefore, any explanatory matter that cannot readily be abbreviated is set out in greater detail in footnotes…”

A Fee-Only financial planner can help you decide on investments and discuss how your investments are faring but you will still want to be able to understand what is going on for yourself.

Investopedia advises investors to look at companies with audited financial statements and look into the annual reports and 10-Ks of companies they want to invest in.