Financial statements give a quantitative picture about any business. For instance one can describe a particular car as "It’s a nice minivan that gives 22mpg and can fit in seven people". But that does not tell us much about the car. To get a clear picture we need to know the details about its Engine, Transmission, brakes, interior, wheels, steering etc. Similarly if one were to describe a state of the business then he has to start with its financial statements. Financial statements are a good starting point for fundamental analysis. The most important point to remember is that financial statements in vacuum are not of much use. They need to be understood with the context of the business. In other words one has to pay close attention as to how the numbers have been calculated. Two identical businesses can have exactly same operations, but there financial statements can differ if they used different accounting guidelines.
COMPARING THE BAKING SKILLS OF TWO WOMEN: If we are comparing Mary and Kathy on how fast they make cookies. Mary might say she takes 1 hr and Kathy may say she takes 45 minutes. In reality both might actually take the same time but the difference might be in the definition of cooking time. For Mary it might include the time to make the dough and for Kathy she might not count that time as cooking time.
Similarly each business has a decision of choosing there accounting processes, that one needs to understand in order to evaluate the numbers of its financial statements. All these details are usually in the notes that follow the financial statements in the 10-k report. The 10-k report for any publically traded company can be found at http://www.sec.gov . For foreign corporations whose securities trade in USA, the corresponding report is the 20-F report. And for Canadian businesses it’s the 40-F report.
