Four Basic Steps to Gauging a Firm's True Financial Position

by Jay Taparia

Understanding a company is similar to understanding your own personal finances. In fact, if you look at a company’s financial statements, you will find that they are similar to our own “personal” financial statements. However, for most of these, there is a different basis for how items are reported. Table 1 provides a simple analogy.

TABLE 1. Financial Statments: Corporate and Personal Similarities
Corporate Statement Personal Statement
Balance Sheet Mortgage Application
Cash Flow Statement Checking Account Statement
Income Statement Personal Tax Return
Footnotes to Financials How you explain your finances to an
investment advisor or IRS auditor

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If you were to analyze your own finances, you typically would start by looking at how much money you have in your checking account and at the transactions posted to your account. This usually represents “the truth” about how you really spent all of your money.

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