• Financing activities, which details cash flow from both debt and equity financing 4. Statement of Shareholders' Equity The statement of shareholders' equity is a financial statement that details changes in the equity held by shareholders, whether those shareholders be public or private investors. A statement of shareholders' equity will typically report changes in the number of shares and value of common and preferred stock, as well as details about whether or not the company has pur- chased back any stock previously held by shareholders (called treasury stock) and other data points. 5. Management's Discussion and Analysis (MD&A) The MD&A is a document written by the company's management, which is designed to accompany financial reports. While it is not a financial document in and of itself, an MD&A will typically provide additional con- text about why the company performed the way that it did during the reporting period, which can be incredibly helpful to investors, analysts, and creditors. According to the SEC, "The purpose of MD&A is to provide investors with information that the company's management believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations. It is intended to help investors to see the company through the eyes of management." While an MD&A should always be taken with a grain of salt, the Sarbanes-Oxley Act of 2002 man- dates that senior corporate officers personally certify in writing that the company's financial state- ments comply with SEC disclosure requirements and fairly present, in all material aspects, the oper- ations and financial condition of the issuer. "Officers who sign off on financial statements that they know to be inaccurate will go to jail (if and when caught)," Ittelson says. Common Types of Financial Statements Companies will often produce a number of financial statements, each of which is tailored to the needs of a particular audience. The information contained in each of these documents will vary by necessity. The most common types of financial statements that you may encounter include: Balance sheets, income statements, cash flow statements, and statements of shareholder equity. 1. Balance Sheets A balance sheet is designed to communicate the "book value" of a company. It's a simple account- ing of all of the company's assets, liabilities, and shareholders' equity, and offers analysts a quick snapshot of how a company is performing and expects to perform. Most balance sheets follow this basic formula: Assets = Liabilities + Shareholders' Equity An asset is anything the company owns which has a quantifiable value. This may include physical property (vehicles, real estate, unsold inventory, etc.), as well as non-physical property (patents, trademarks, etc.). Liabilities refer to money the company owes to a debtor. This may include outstanding payroll ex- penses, debt payments, rent and utility payments, money owed to suppliers, taxes, bonds payable, and more. Shareholders' equity is a term that generally refers to the net worth of a company. It reflects the amount of money that would be left if all assets were sold and all liabilities paid. This money belongs to the shareholders, whether they are a private owner or public investors. 2. Income Statements An income statement is a report that a company generates in order to communicate how much money it has earned over a period of time. They're often found as quarterly and annual reports. In addition to communicating top-line revenue, income statements detail a number of other metrics that can be helpful to analysts and investors. These include: • Operating expenses, which detail every expense the company encountered during the report- ing period • Depreciation, which quantifies the extent to which a company's assets (for example, aging equipment or vehicles) have lost value over time • Net income, which subtracts the company's expenses from its gross revenue in order to deter- mine its total level of profits or loss • Earnings per share (EPS), which divides net income by the total number of outstanding shares 3. Cash Flow Statement A cash flow statement is a report that details how a company receives and spends its cash. These are also called cash inflows and outflows. A company can only operate as long as it has the money to cover its expenses. Cash flow reflects a company's ability to operate in both the short- and the long-term, and is used by investors, cred- itors, and regulators to determine whether a company is in good financial standing. Cash flow statements are typically split into three sections: • Operating activities, which details cash flow generated from the company delivering upon its goods or services, including both revenue and expenses • Investing activities, which details cash flow generated from the buying or selling of assets, such as real estate, vehicles, and equipment (using free cash and not debt)