The Comprehensive Guide on How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, + Website

CHAPTER 5

PROFIT ISN’T EVERYTHING AND ALL THINGS

Remember—Everything’s Connected

If you haven’t figured it out by now, let us reinforce two critical underlying premises and objectives of this book:

• First, everything is connected: That is, all information presented in financial statements and reports, in one fashion or another, is connected to another information source. The income statement connects with the balance sheet, the balance sheet connects with the statement of cash flows, the statement of cash flows connects with the income statement, and even the financial statement footnotes connect to the financial statements. But let’s face it, accountants by their own admission and guilt, must have these connections to ensure that the financial statements make sense and present fairly, the operating results of a company.
• Second, all information is essential: To truly understand the financial results and condition of a company, all financial information needs to be evaluated and understood to make an informed and proper assessment (and decision if applicable). Relying on just one piece of financial information, such as the income statement, only tells a portion of the story and is often a fatal error made by novices (e.g., the company generated a profit so it must be a good investment).

Tips, Tidbits, and Traps

To expand on the concept of having all information available, you ...