Getting to Know the Financial Statements

Aaaagghh... Balance Sheets and Income Statements. Who can even read those things? With all those numbers and foreign words, who can even look at them?

You can, and if you're gonna be a Chick, you will.

Relax, it's easy... as long as you know what you're looking for, and what they mean. You'll be a whiz in no time. Follow along.

First of all, a company is required by law to file a Financial Statement with the Security Exchange Commission (SEC) every three months. This is called a quarter. Four quarters equal one year. The quarterly statements are called 10Q's. The yearly statements are called 10K's. Remember that: 10Q = Quarterly Statement; 10K = Yearly Statement. The Financial Statements tell the accounting history of a company. They are made up of the Balance Sheet and the Income Statement.

The Income Statement

The Income Statement is a short-term indicator of how a company's day-to-day business is doing. For example, your monthly checking account statement would be similar to an Income Statement. It tells the story of what happened in your financial life in the past month -- how money came into your pocket, and how you spent it. Simple as that. An Income Statement for a business does the same. Where and how did their money come in, and what did they spend it on going out? I sound like Dr. Seuss. Go Dog, Go.

On the income statement you will find terms like Sales (money coming in), Cost of Goods Sold (money going out), and Net Income (what they have left of the money that came in after they paid money out). Those are the only three items that you need from the Income Statement.

I told you it was going to be easy.

The Balance Sheet

Have you ever filled out one of those loan applications where you were asked to list your Net Worth? On the one side you tally up all of your assets:  home, car, boat, stocks, and cash in the bank. On the other side of the application you fill out all of your liabilities: your mortgage, a car loan, and credit card balances. Then after all that, you take your assets and subtract your liabilities and you get your net worth. Well, companies aren't just asked to do this; they are required to do it. They must fill out a similar form every three months and at the end of every year. It is called a Balance Sheet and we get to look inside their company and see what they are worth!

They have to list the same things... assets and liabilities. The only numbers we need off of the Balance Sheet for our Chick's Dozen are the Current Assets, Cash, Current Liabilities, Short Term Debt and Long Term Debt. There is a lot more there, but don't let it confuse you; we only need those five.

I'll explain each one.

Current Assets are everything the company owns; from the buildings it uses to conduct business to the cash it has in the bank. One side note on the Cash figure on the Balance Sheet: When the Cash amount for a Chick's Dozen criteria is needed, you need to also add in the Marketable Securities. These are stocks or treasury bonds that could easily be turned into Cash. Every company lists them differently, probably to confuse us, but it is important to add anything that can be turned into Cash quickly (stocks, treasuries, bonds) to the Cash Amount and use that figure as the TOTAL CASH. If this figure is there, it will be immediately following the Cash figure.

TOTAL CASH = Cash + Marketable Securities.

Current Liabilities are what the company owes. The bill to the garment factory in New York for custom designing new Chick pajamas would be an example. The Short Term Debt figure is the part of the Current Liabilities that the company will pay off in the next year. The Long Term Debt figure incorporates the bills that will take years to pay back, like the mortgage on their buildings.

How the Balance Sheet and Income Statement are linked.

The Income Statement is a short-term indicator of how the company's business is doing. Hopefully, for the company's sake, its Net Income continues to increase. This is a good thing, Martha. (I don't think she needs to worry about that. She seems to be living just fine.) If their Net Income increases month to month, over time, their Cash will be increasing on their Balance Sheet, which in turn increases their Current Assets. The Balance Sheet indicates what the financial health of a company has been over time.

Voila! You are now proficient in 10K's and 10Q's! Try to work your new lingo into the dinner conversation tonight.

Here again are the numbers you will need to calculate the Chicks' Dozen and where to find them.