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The five rules for successful stock investing Part 3

Now that you have a good idea of how business generate cash and how profits are recorded on financial statements, let's look at each of the three financial statements in detail | 5 Financial Statements Explained Now THAT YOU have a good idea of how businesses generate cash and how profits are recorded on financial statements let s look at each of the three main financial statements in detail. Unfortunately not all businesses are as simple as a hot dog stand so we need to introduce some additional complexity if we want to analyze real companies. But fear not as we walk through the balance sheet income statement and cash flow statement we ll look at a few real-world companies to see what their financial statements can tell US about how their businesses are functioning. Wherever possible I ll refer to excerpts from the financial statements of Dell and Hewlett-Packard H-P taken from the two firms IO-K filings with the SEC. The Dell excerpts contain data through January 31 2003 and the H-P excerpts contain data through October 31 2002. We ll start with the balance sheet move on to the income statement and finish with the statement of cash flows. At the start of each section you ll see a financial statement from the originally named and fictitious Acme Corporation that will show you how each statement is organized. Warning This chapter may be tough going in parts but it s possibly the most important chapter of the entire book since reading financial statements 50 FINANCIAL STATEMENTS EXPLAINED is the foundation for analyzing companies. If you find yourself confused about a concept or getting tired put down the book and take a break. There s no rush it ll be here when you get back The Balance Sheet The balance sheet see Figure 5.1 sometimes called a statement of financial position tells you how much a company owns its assets how much it owes its liabilities and the difference between the two its equity . Equity represents the value of the money that shareholders have invested in the firm and if that sounds odd think of it just like your mortgage your equity in your home is the home s value minus the mortgage. Stockholders equity in a firm is the .