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

Find answers to key questions about financial statements.

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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?

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