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FAQs on evaluating financial statements of a manufacturing company

Srinivasa Sharan
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FAQs on evaluating financial statements of a manufacturing company

1) What are the key financial statements of a manufacturing company? 

The key financial statements of a manufacturing company are the income statement, the balance sheet, and the cash flow statement. While the income statement shows the level of activity for a company during a period (usually a quarter or a year), the balance sheet shows the financial position of a company at a particular point in time (usually half-yearly or annually). 

2) What are the important line items in the income statement? 

The income statement or P&L statement is the financial statement that shows the revenues, expenses and net income generated by a company during a specific period.  The important line-items of an income statement include product-level revenue (this may include several lines if the company sells several products), cost of goods sold (COGS), gross profit (which is estimated by deducting COGS from revenue), selling, general, administrative expense (SG&A), interest expense and any other expense. 

3) What are the important items in the assets side of the balance sheet of a manufacturing company? 

A company’s balance sheet also called ‘statement of financial position’ shows the firm’s assets, liabilities, and owners’ equity (net worth).  Assets in the balance sheet must always equal the liabilities plus the shareholders' equity. Under assets, we have the current assets as well as the non-current assets. Current assets include cash and other short-term investments, accounts receivable, inventory, or stock in trade, which is usually a large amount for a manufacturing company.  Non-current assets are those assets that have a lifespan of more than one year. They are represented by tangible assets like machinery, computers, building and land. There may also be intangible assets in the form of goodwill, patents, or copyright. 

4) What are the important items in the liabilities side of the balance sheet of a manufacturing company? 

On the other side of the balance sheet are the liabilities of a company. These represent financial obligations that a company owes to external parties. Current liabilities are the company’s liabilities that will come due and must be paid within one year. It includes short-term borrowings such as accounts payable, and the current portion of long-term borrowings. Long-term liabilities include long-term debt and any other payments that are due by the company after a year. Shareholders’ equity represents the initial contribution of the owners and other shareholders to the company. At the end of every fiscal year, a company may decide to re-invest its earnings after taxes into the company. The shareholders' equity will increase by the amount of re-invested earnings after tax. 

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