Company accounts: profit, cash and the notes

Match the statement to the question

The income statement covers a period of revenue and expenses. The balance sheet records assets, liabilities and equity at a date. The cash-flow statement describes movements in cash over a period. Check units, currency and fiscal year before comparing anything.

For a US filing, start with the business description, risk factors and management discussion, then read the statements and notes together. Management writes the filing; the SEC does not certify a company as a sound investment.

Bridge earnings to cash

Operating cash flow can differ from profit because of non-cash items and working-capital movements. A rising receivables balance may reflect timing, acquisitions or changing collection conditions; it is a question to investigate, not proof of misconduct.

Free cash flow is not a universally identical definition. Record whether a source means operating cash flow minus capital expenditure and read any adjustments. A non-cash expense can still have economic consequences.

Compare like with like

Match quarterly with quarterly and annual with annual. Check restatements, discontinued operations and acquisition effects. Debt balances and cash balances are snapshots; interest expense and revenue cover periods.

• Trace important numbers back to the original filing.
• Read debt maturities, accounting policies and contingent obligations.
• Keep a plausible alternative explanation beside every apparent anomaly.