📚 Financial Statement “Bible” for Investors

For FIN509 MBAs as investors (not accountants): how to read the Balance Sheet, Income Statement, Cash Flow Statement, and Free Cash Flow (FCF) to understand a company quickly — whether you are just starting, or with decades of work experience. 😊

Theme: FIN509 • Chapters 2 & 3

1. 🌐 Big Picture — How Investors Use the Statements

Public companies publish three core financial statements plus disclosures. As an investor, you do not need to prepare them — you need to read, connect, and question them.

📊 Balance Sheet

Snapshot of what the company owns and owes at a point in time.

📈 Income Statement

Performance over a period: sales → profits.

💸 Cash Flow Statement

Follows the cash: operations, investing, and financing.

Investor mindset 💭: “Does this company create sustainable cash for its investors? Are profits real, or mostly accounting?”
  • Balance Sheet → quality of assets, leverage, liquidity.
  • Income Statement → growth, margins, profitability trends.
  • Cash Flow Statement → cash generation and use (capex, debt, dividends).
  • Free Cash Flow (FCF) → cash left for all investors after maintaining the business.
👩‍💼 If you already have experience (older / mid-career students):
Connect this to what you have seen at work. Think of a company you know well (employer, client, stock you own). As you move through each section, ask: “Do their statements match the story management tells in meetings or the media?”

2. 📊 Balance Sheet — “What the Company Owns and Owes”

Snapshot Quality & safety Leverage risk Finviz: ⬇️ Debt, ⬆️ Cash

2.1 What it shows

The Balance Sheet reports Assets, Liabilities, and Shareholders’ Equity at a specific date (e.g., “as of December 31, 2024”). It must balance: Assets = Liabilities + Equity.

2.2 Where to see it quickly (Finviz & Nasdaq) 🧭

  • Finviz: type the ticker → on the main “Quote” page you will not see the full balance sheet, but you will see key summary stats:
    • Debt/Eq, LT Debt/Eq → leverage.
    • Quick ratio, Current ratio → liquidity.
    • Cash/sh → cash per share.
    Use these as a fast health check.
  • Nasdaq.com or similar: ticker → “Financials” → “Balance Sheet” to see the actual line items (Cash, AR, Inventory, PP&E, Debt, Equity).
  • SEC 10-K / 10-Q: “Consolidated Balance Sheets” for the official version plus footnotes.

2.3 Key items to scan quickly

Current Assets 💵

  • Cash & equivalents — true liquidity.
  • Accounts receivable — sales not yet collected in cash.
  • Inventory — risk of obsolescence or markdowns.

Long-Term Assets 🏭

  • Property, plant & equipment (PP&E) — “hard” operating assets.
  • Intangibles & goodwill — from acquisitions; can be impaired later.

Current Liabilities 📬

  • Accounts payable — trade credit from suppliers.
  • Short-term debt and current portion of long-term debt.

Long-Term Liabilities & Equity 📉📈

  • Long-term debt — leverage and refinancing risk.
  • Shareholders’ equity — book value, retained earnings.

2.4 Ratios mainly from the Balance Sheet

ConceptRough idea (not for calculation)
Liquidity (Current ratio, Quick ratio) Can the firm cover near-term obligations with near-term assets?
Leverage (Debt/Equity, Debt/Assets) How much of the business is financed by creditors versus owners?
Asset intensity (Assets/Sales) How many assets are required to support a dollar of sales?

2.5 Common “games” and red flags 🚩

  • Exploding receivables while sales grow slowly → may indicate aggressive revenue recognition or customers struggling to pay.
  • Inventories rising faster than sales → risk of future write-downs and lower margins.
  • Very large goodwill and intangibles from acquisitions → if the core business underperforms, future impairment charges may hit earnings.
  • Short-term debt creeping up → liquidity pressure, especially in downturns or when rates are high.
👴👩‍💼 If you already have experience:
Pick 2–3 stocks you know (or your employer if public), pull them up on Finviz, and look only at Debt/Eq, Current ratio, and Cash/sh. Ask: “Does this match how risky the balance sheet feels from the inside?”

3. 📈 Income Statement — “How the Company Earns Profit”

Period performance Growth & margins Earnings quality Finviz: Sales & Margins

3.1 What it shows

The Income Statement (Profit & Loss, or “P&L”) shows how sales become profit over a period (quarter or year). Key line items:

  • Revenue (Sales) → top line.
  • Cost of goods sold (COGS) → direct cost of producing goods/services.
  • Gross profit = Sales − COGS.
  • Operating expenses (R&D, SG&A, marketing, etc.).
  • Operating income (EBIT) — core business profit before interest and taxes.
  • Interest, other income/expense.
  • Net income — “earnings” after all expenses and taxes.

3.2 Finviz view vs. full statement

  • On Finviz (Quote page) you can quickly see:
    • Sales growth (q/q, y/y).
    • Gross margin, Operating margin, Net profit margin.
    • EPS, EPS next Y, EPS past 5Y.
    This gives you a fast picture of growth and profitability without opening the full statement.
  • On Nasdaq.com or similar: ticker → “Financials” → “Income Statement” to see the full revenue and expense breakdown year by year.
  • In 10-K / 10-Q: “Consolidated Statements of Operations” for the official format.

3.3 Key items and “story questions” 🤔

  • Revenue trend: Is sales growth stable, accelerating, or slowing?
  • Gross margin: Does the company have pricing power or cost pressure?
  • Operating margin: Are operating expenses under control as the firm grows?
  • Interest expense: Is debt becoming heavier relative to operating income?
  • Net margin: How much of each dollar of sales becomes profit?

3.4 Important ratios from the Income Statement

MarginEconomic meaning
Gross margin Core economics of the product (pricing vs direct cost).
Operating margin Profit from operations after overhead (SG&A, R&D).
Net margin Bottom-line profit after all costs, interest, and taxes.
EPS (Earnings per share) Profit per share — highly watched by markets.

3.5 Typical manipulation risks 🚨

  • Aggressive revenue recognition (booking revenue early, long-term contracts, “channel stuffing”).
  • “One-time” adjustments every year — restructuring, “special” charges that never end.
  • Capitalizing expenses to the Balance Sheet instead of expensing them (e.g., aggressive capitalization of software or content costs).
  • Very smooth earnings in a volatile industry — may indicate earnings management.
🧠 If you already have experience:
On Finviz, compare 2–3 competitors in the same industry. Look only at Gross margin, Operating margin, and Net margin. Ask yourself: “Do these margins fit what I know about their business models and pricing power?”

4. 💸 Cash Flow Statement — “Follow the Cash”

Cash reality Quality of earnings Capex & financing Finviz: Cash Flow proxies

4.1 What it shows

The Cash Flow Statement reconciles beginning and ending cash. It answers: Where did the cash actually come from, and where did it go?

  • CFO — Cash Flow from Operations: cash from the core business.
  • CFI — Cash Flow from Investing: capex, acquisitions, investments.
  • CFF — Cash Flow from Financing: issuing/repaying debt, share issues/buybacks, dividends.

For valuation and company health, CFO and Capex are usually the most important pieces.

4.2 Where to find it 🌍

  • On Finviz you won’t see the full statement, but:
    • Operating margin and Net margin combined with low capex industries often signal strong cash conversion.
    • Payout ratio and Dividend yield give hints about how much cash is returned to shareholders.
  • On Nasdaq.com: ticker → “Financials” → “Cash Flow” for CFO, Capex, and financing flows.
  • In 10-K / 10-Q: “Consolidated Statements of Cash Flows”.

4.3 How to read CFO, CFI, CFF as an investor 👀

CFO — Operations

  • Starts from net income and adjusts for non-cash items (depreciation, etc.).
  • Adjusts for working capital (AR, inventory, AP).
  • Rule of thumb: over time, CFO should track earnings.

CFI — Investing

  • Capex (capital expenditures) is the big one.
  • Usually negative (cash outflow) for growing firms.
  • Acquisitions can be large and lumpy.

CFF — Financing

  • Debt issued or repaid.
  • Equity issued or share repurchases.
  • Dividends paid to shareholders.

4.4 Red flags and questions 🚩

  • Net income rising but CFO flat or declining → earnings quality concern.
  • Very negative CFI every year without improving earnings → is capex productive or wasteful?
  • Company paying high dividends/buybacks while CFO is weak → may be borrowing to “support” payouts.
  • Large, unexplained swings in working capital — investigate notes to financial statements.
📊 If you already have experience:
Take a mature “cash cow” company and a high-growth company. On Nasdaq, compare their CFO and Capex over 3–5 years. Relate this back to your experience: which business feels more “cash hungry” or “cash rich” in practice?

5. 💡 Free Cash Flow (FCF) — “Cash Available to All Investors”

Valuation core From CFO & Capex Finviz: FCF proxies & Yield

5.1 Concept (no calculation needed here)

Free Cash Flow (FCF) is the cash the company generates from operations after it has reinvested enough to maintain and grow the business (capital expenditures and working capital). A common variant is:

FCF ≈ Cash Flow from Operations − Capital Expenditures

In valuation, FCF belongs to all capital providers — both debt and equity investors.

5.2 How investors use FCF

  • Discounted Cash Flow (DCF) valuation models are based on expected FCF.
  • FCF yield ≈ FCF / Market Cap — a “cash earnings yield” for shareholders.
  • Comparing FCF to net income tests earnings quality: Is profit turning into cash?
  • Assessing sustainability of dividends and share buybacks.

5.3 Where to find FCF or get close to it 🔍

  • Some data providers show an FCF line directly.
  • Otherwise, use CFO and Capex from the Cash Flow Statement: “Net cash from operating activities” and “Capital expenditures”.
  • Finviz doesn’t show FCF directly, but combining: Operating margin, Capex intensity of industry, and Payout ratio gives a rough idea of how much free cash is available.

5.4 FCF red flags ⚠️

  • Net income looks great but FCF is consistently weak or negative — profits may not be “real” in cash terms.
  • FCF positive only because capex has been slashed — may be under-investing in the future.
  • Very volatile FCF without a clear business explanation (e.g., project cycle) — investigate notes and MD&A.
💼 If you already have experience:
Think like a private business owner: “If I owned 100% of this company, how much cash could I safely pull out each year without hurting operations?” That is the economic intuition behind FCF and DCF models.

6. 🔎 Using Finviz, Nasdaq & SEC Together

As an investor, you rarely start with the raw PDF. Begin with an investor-friendly dashboard (Finviz), then confirm details using Nasdaq and the official SEC filings.

6.1 Practical 3-step routine

  1. Step 1 — Finviz (fast scan) 🚀
    Type the ticker → Quote tab.
    Look at:
    • Valuation: P/E, Forward P/E, P/S, P/B.
    • Profitability: Gross margin, Operating margin, Net margin, ROE, ROA.
    • Debt & Liquidity: Debt/Eq, LT Debt/Eq, Current ratio, Quick ratio.
    You now have a 30-second snapshot of quality, growth, and risk.
  2. Step 2 — Nasdaq (structure view) 🧩
    Open “Financials” → Income Statement, Balance Sheet, Cash Flow. Use this page to see the actual line items over time.
  3. Step 3 — SEC (deep dive) 📑
    If something looks strange or important (large debt, unusual margin change, big write-off), open the latest 10-K / 10-Q on EDGAR and read the MD&A and notes.
🧓 If you already have experience:
Build your own “short list” of 5–10 Finviz fields you trust most (for example, Gross margin, Net margin, ROE, Debt/Eq, P/E, EPS next Y). Use them as your quick filter before you ever open the full 10-K.

7. ⚠️ GAAP, Enron & Famous Accounting Scandals

Why statements can mislead Fraud & “creative” accounting

7.1 What is GAAP? 📘

GAAP (Generally Accepted Accounting Principles) are the rules U.S. companies must follow when preparing financial statements. They provide a common language so investors can compare firms. But:

  • GAAP allows judgment (estimates, assumptions, choices among acceptable methods).
  • Within GAAP, managers can be more conservative or more aggressive.
  • Fraud occurs when companies go outside GAAP or intentionally mislead.

7.2 Classic scandals (Enron, WorldCom, etc.) 🧨

  • Enron — used off-balance-sheet entities and complex derivatives to hide debt and inflate profits. The Balance Sheet looked stronger than reality.
  • WorldCom — improperly capitalized expenses (recording operating costs as assets), making earnings look better in the short run.
  • Wirecard — reported cash and profits in subsidiaries that did not actually exist, fooling investors and auditors for years.
  • Luckin Coffee — inflated sales through fake transactions, overstating revenue growth.
Lesson: GAAP statements reduce noise, but they do not remove the need for skepticism. Always connect the numbers to business reality.

7.3 How an investor can protect themselves 🔍

  • Compare Net income vs. CFO and FCF — profits without cash are a warning sign.
  • Watch for large or growing adjustments between GAAP and “adjusted” earnings.
  • Be cautious when the story is “too perfect”: rapid growth, high margins, very low volatility.
  • Read at least some of the MD&A and footnotes for major positions (revenue recognition, goodwill, off-balance-sheet items).
👓 If you already have experience:
Think of a time when reported numbers in your organization did not fully match the underlying business reality (good or bad). As you read about Enron and others, map their tricks onto the three statements. Ask: “If I had looked at Cash Flow and debt more carefully, what would I have seen?”

8. ✅ 10-Minute Investor Workflow Using the Statements

When you first look at a company, you do not need every note. Start with a structured, repeatable routine:

  1. Start with Finviz (1–2 minutes)
    Scan valuation, margins, ROE, Debt/Eq, and liquidity ratios.
  2. Check the Income Statement (2 minutes)
    Use Nasdaq to see revenue and margin trends for 3–5 years.
  3. Check the Balance Sheet (2 minutes)
    Look at cash, debt, receivables, inventory, and equity. Is leverage reasonable?
  4. Check the Cash Flow Statement (2–3 minutes)
    Compare CFO with net income, and note Capex and any big swings.
  5. Think in terms of FCF (1 minute)
    Roughly, “CFO minus capex”: is there solid free cash after investment needs?
  6. Look for red flags (1–2 minutes)
    Any big mismatch between earnings and cash, exploding receivables/inventories, or frequent “one-time” charges? If yes, dig deeper before trusting the story.
Goal for FIN509: You should be able to open a company’s pages on Finviz and Nasdaq, glance at the three statements, and explain in plain English what you like and what worries you — using the concepts on this page. 🌟
🎯 For experienced students:
Turn this workflow into your personal checklist for any stock idea you hear (podcast, friend, advisor). Before you react emotionally, walk through these steps and let the statements speak for themselves.

9. 📺 Short Video Intros (Optional)

If you like learning by video, these are good, short overviews of the three main statements and Free Cash Flow (FCF). You can watch them before or after reading this page.

Tip: If you are returning to school after many years, these videos can be a gentle “refresher” before we dive into more detailed examples in class. 🎧