Today I begin a series on understanding financial statements courtesy of our sponsor D&B Canada. [Learn More]

Understanding how to read your financial statements is an important business skill. The financial statements provide a flow of information about the past performance of the business and are used to help management make informed business decisions.

They also provide bankers, investors, and shareholders with the information they need to understand the current financial performance your company. In the case when you are borrowing money, they help bankers and investors to assess the risk involved.

How Financial Statements Are Put Together: Generally an accounting department, a bookkeeper or the owner of a business systematically records, sorts and summarizes the thousands of documents (register tapes, invoices and vouchers) representing the transactions of business. These transactions include: sale of merchandise; payroll distribution; material purchases for inventory - to mention just a few. These facts are then compiled, classified and summarized into financial reports for a business so that a financial statement can then be prepared.

Financial statements are customarily prepared on a quarterly, biannual or annual basis. The date of a financial statement is of considerable importance. Most are usually drawn up on a yearly (fiscal) basis. Statements provided that are outside of the fiscal closing are known as interim statements.

Business Has Different Forms Of Ownership: bookkeeping and accounting principles treat any business as a separate entity apart form the owners or principals, purchase goods, sell products and pay salaries. This distinction of the business apart from the owners in important in understanding how financial statements are presented.

D&B maintains information on 12 million U.S. businesses in its information files. Over 99 percent of these concerns are privately held proprietorships, partnerships or corporations.

A privately held business is usually run by a small number of principals who answer only to themselves. Publicly owned companies, on the other hand, are corporations run by management answering to an elected board of directors, numerous stockholders and regulators, and whose shares of stock (ownership) can be purchased by the public at large.

Drop by to view the entire D&B article.