Merrill Lynch Financial Analyst Booklet

The financial statements generally consist of the balance sheet, income statement,
and statement of changes in shareholders equity, statement of cash flows and
footnotes. The annual financial statements usually are accompanied by an
independent auditors report (which is why they are called audited financial
statements). An audit is a systematic examination of a companys financial
statements; it is typically undertaken by a Certified Public Accountant (CPA). The
auditors report attests to whether the financial reports are presented fairly in
keeping with generally accepted accounting principles, known as GAAP for short.

The Balance Sheet

The balance sheet, also called statement of financial position, portrays the financial
position of the company by showing what the company owns and what is owes at
the report date. The balance sheet may be thought of as a snapshot, since it reports
the companys financial position at a specific point in time. Usually balance sheets
represent the current period and a previous period so that financial statement
readers can easily identify significant changes.

The Income Statement

On the other hand, the income statement can be thought of more like a motion
picture, since it reports on how a company performed during the period(s)
presented and shows whether that companys operations have resulted in a profit or
loss.

The Statement of Changes in Shareholders Equity

The statement of changes in shareholders equity reconciles the activity in the
equity section of the balance sheet from period to period. Generally, changes in
shareholders equity result from company profits or losses, dividends and/or stock
issuances. (Dividends are payments to shareholders to compensate them for their
investment.)

The Statement of Cash Flows

The statement of cash flows reports on the companys cash movements during the
period(s) separating them by operating, investing and financing activities.
**The main nongovernmental bodies that set rules and standards are the Financial
Accounting Standards Board [FASB] the primary, authoritative private-sector
body that sets financial accounting standards, the American Institute of Certified
Public Accountants [AICPA] and the exchanges the securities trade on**

Key point
Typical financial statements are illustrative and generally representative for a
manufacturing company. However, financial statements in certain specialized
industries, such as banks, broker-dealers, insurance companies and public

utilities, would look somewhat different. Thats because specialized

accounting and reporting principles and practices apply in these and other
specialized industries.

Balance Sheet
Assets
Current Assets
In general, current assets include cash and those assets that, in the
normal course of business, will be turned into cash within a year from the balancesheet date. Current assets are listed on the balance sheet in order of their
liquidity or amount of time it takes to convert them into cash.
Cash and Cash Equivalents
This just as expected, is money on deposit in the bank, cash on hand
(petty cash) and highly liquid securities such as Treasury bills.
Marketable Securities
Excess or idle cash that is not needed immediately may be invested in
marketable securities. These are short-term securities that are readily salable and
usually have quoted prices. These may include:
1. Trading securities debt and equity securities, bought and sold
frequently, primarily to generate short-term profits and which are
carried at fair market value. Any changes in such values are included in
earnings. (Fair market value is the price at which a buyer and seller are
willing to exchange an asset in other than a forced liquidation)