How to Read Financial Statements?
March 31, 2026
In every business, it is important for us to read financial statements, whether you are an owner, an investor, a commissioner, a director, a manager, a creditor, a tax officer, an auditor and an accountant.
Financial Statements consist of cash flows statements, statement of financial position, statement of comprehensive income, statement of shareholder’s equity, and notes to the financial statements.
First, let’s talk about cash flows statement, this a heartbeat of every business, these established business makes profit regularly (sometimes it is not) and equally important to keep good financial condition in terms of a good rating, banks are willing to lend money to the company on very competitive terms. In other hand, if our business needed more capital for expansion, new investors would be willing to supply fresh money to our business. None of this comes simple or easy!
It takes good management to make profit, to raise capital and to
stay out of financial difficulties.
Basically, there two method or types of cash flows statements format, whether its direct or indirect method. The main difference is only in presentation of its operating activities. Direct method will be showed source of cash receipt from who or payment to whom while indirect method will adjust net income with non-cash transaction, such as depreciation, amortization, provision and showed working capital details within current assets and current liabilities.
The cash flows statements, in its bottom line the net of three activities, operating activities, investing activities, and financing activities, all of them simply reflected from increase or decrease of current month compared with prior month. If negatives cash flows on one of these activities, it means cash used by our business during the current month. Otherwise means cash provided by our business.
When an asset account is decreasing compared with prior month, it means cash receipt and shows with Rp123 as a source of cash inflow. Otherwise, whenever a liability account is decreasing compared with prior month, it shows cash paid and shows with (Rp345) as a source of cash outflow.
Operating activities reflect every changed in current assets and current liabilities whether its increase or decrease, such as cash receipt from customer, cash payment to vendor for main material or internet service provider in order to produce goods or services, cash payment to electricity provider or maintenance, cash payment to tax office, cash payment to employees in production, marketing, general and administrative department.
Investing activities reflect every changed in non-current assets whether its increase or decrease, such as capital expenditure, purchase or disposal of fixed assets and borrowing costs for capital costs.
Financing activities reflect every changed in non-current liabilities and equities whether its increase or decrease, such as loan received, principal loan payment, interest loan payment, dividend payment, additional paid-in capital and debt to equity conversion.
Overall activities produced a net of cash surplus or deficit during the current month compared with prior month.
Well, here is the two most important types of information that cash flows statements does not tell us:
- Profit earned or loss suffered by our business for this current month.
- The financial condition of the business at the end of this current month.
Second, the statement of financial position will show performance of our business, in fundamental analysis we could be used financial ratios for its performance measurement in order to review our going concern by analyze for short-term and long-term abilities of our business to survive in maintain its cash flows and liquidity to pay our obligation and loans. We should be remembered about DuPont analysis in terms of break-down of Return on Equity or “ROE” into three parts:
- Profitability measured by Profit Margin.
- Operating efficiency measured by Asset Turnover.
- Financial leverage measured by Equity Multiplier.
Formula of ROE = (Profit Margin) x (Asset Turnover) x (Equity multiplier) = (Net profit/Sales) X (Sales/Assets) x (Assets/Equity) = (Net Profit/Equity).
If ROE showed 20%, it means every Rp100 of our equity provides Rp20.
Most of us should be noted that all of these accounts are not cash basis but accrual basis, e.q. it means that our sales revenues in statement of comprehensive income, its details derived from cash sales and credit sales, if credit sales. Outstanding of account receivables will be remained until its settled by our customer to pay within agreed term of payment.
Third, the statement of comprehensive income, there are two format, first format showed sales revenues, cost of goods or service sold, gross profit, sales marketing, general and administrative expenses, depreciation expenses, operating income, interest expenses, tax expenses and net income. This net income will be moved into retained earnings account in equity of statement of financial position. Second format showed Other Comprehensive Income or “OCI”, basically there are five components of OCI:
- Revaluation surplus of fixed assets. Refer to Indonesian Financial Accounting Standars “Pernyataan Standar Akuntansi Keuangan” or “PSAK” 16.
- Gains or losses on actuarial valuation for defined benfits. Refer to PSAK 24.
- Gains or losses on translation of financial statements for foreign entity. Refer to PSAK 10.
- Gains or losses on financial assets remeasurement and classified as available for sale. Refer to PSAK 55.
- Gains or losses on cash flow hedging. Refer to PSAK 55.
Earnings Before Interest, Tax, Depreciation and Amortization or “EBITDA” is one of tool to determine achievement of current month performance compared with monthly budget.
Sometime, in manufacture contribution margin format of statement of income will helpful to calculate Break Even Analysis. Sales revenues deducted with variables costs then results its contribution margin whether its positive or not. Simply used contribution margin in Rupiah divided by goods or services sold in unit equivalent to obtain contribution margin per unit, i.e., Rp100 per unit. If we would have fixed investment Rp1.000 then dividend with Rp100 per unit contribution margin, we should be able to sell 10 units to reach our Break Even.
Fourth, the statement of shareholder’s equity will show the beginning balance of retained earnings added with current month net income then deducted with cash dividend, if any. Finally bottom line will be reflected in retained earnings account in equity of statement of financial position (refer to third point as per above mentioned).
Fifth, the notes to financial statements represent full disclosures of current condition of our business process in accordance with Generally Accepted Accounting Principles (as mentioned above, Indonesian Financial Accounting Standards in Indonesia, it’s called PSAK which in progress to full adoption into current issued of International Financial Reporting Standards or “IFRS”) then connected to relevant amount which have disclosed in references within cash flows statements, the statement of financial position, the statement of comprehensive income and the statement of shareholder’s equity.
Hopefully, we will be able to read financial statements in better ways in whatever our roles and responsibilities!
By Gerry Tjandra – Partner Tax and Accounting
