Skip To Main Content
Businessman reviewing financial statements

Reading financial statements: What do I need to know? FAQ

Find answers to key questions about financial statements.

Understanding the fundamental concepts, conventions and principles underlying financial statements is essential to financial literacy.

This publication aims to answer some key questions a user trying to obtain a basic understanding of financial statements might ask, such as:

Understanding concepts and practices:

  • Are financial statements precise?
  • What does "consolidated" mean in the context of financial statements?
  • Why are assets and liabilities recognized in the financial statements measured in different ways?
  • What is the difference between costs recognized as assets and those recognized as expenses?
  • What is the difference between net income or loss and "comprehensive" income or loss?
  • What is the difference between the income statement and the statement of cash flows?
  • What are the elements and complexities of equity?
  • What is the importance of the notes to the financial statements?
  • What is the significance of disclosures about "going concern?"

Understanding reports, including structure and organization:

  • What is the importance of the auditor's report? How do interim reports differ from annual reports?
  • Why do similar companies use such different labels, captions and formats when they prepare their statements?
  • What is the importance of all the subtotals in the income statement — "gross margin," "loss before other items," etc.?
  • What is the importance of the distinction between current and non-current (or long-term) assets and liabilities? When is "ratio analysis" helpful in understanding the financial statements?
  • What is the Management's Discussion & Analysis (MD&A)?

Understanding specifics:

  • What are the complexities of recognizing revenue?
  • What are goodwill and intangible assets?
  • How does one assess the success of an acquisition?
  • What are the ways of accounting for investments in equity securities?
  • What are depreciation and amortization?
  • What are impairment losses?
  • What is "stock-based compensation" and how does the accounting work?
  • How does foreign exchange accounting work?
  • What do the tax numbers in financial statements mean?
  • What are earnings per share (EPS) and diluted earnings per share?
  • What information do financial statements provide about dividends and similar distributions?
  • How do financial statements treat mineral properties?
  • What is segment reporting?
  • How do financial statements treat events occurring after the end of the reporting period?