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Financial Data Analysis Basics

Stock variables represent a snapshot in time, while flow variables have a time dimension and measure quantities over a specified period. Income statements contain flow variables that measure quantities like revenue and expenses over time, while balance sheets contain stock variables that represent values at a single point in time. It is important to note the time dimension associated with flow variables to correctly interpret historical data and develop financial forecasts into the future. Stock variables on a balance sheet may not accurately represent a company's normal financial position over longer periods like quarters or years due to random events or deliberate window dressing by the company.

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37 views1 page

Financial Data Analysis Basics

Stock variables represent a snapshot in time, while flow variables have a time dimension and measure quantities over a specified period. Income statements contain flow variables that measure quantities like revenue and expenses over time, while balance sheets contain stock variables that represent values at a single point in time. It is important to note the time dimension associated with flow variables to correctly interpret historical data and develop financial forecasts into the future. Stock variables on a balance sheet may not accurately represent a company's normal financial position over longer periods like quarters or years due to random events or deliberate window dressing by the company.

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ikhan5
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Stock and Flow Variables

Grasping the difference between stock and flow variables is essential to


understanding and analyzing financial and economic data. Mathematically speaking,
a flow variable is a vector, a two-dimensional measurement. One of these
dimensions is time. The other is the quantity of the variable in question that was
tabulated over the specified period. By contrast, a stock variable is a one-
dimensional measure. It is an instantaneous measure, taken at a precise moment in
time. As a result, stock variables often are referred to as snapshot values.

Income statements are collections of flow variables. Balance sheets contain stock
variables.

The Time Element


Since audited financial statements typically are produced on both a quarterly and an
annual basis, these are the most common time dimensions encountered in dealing
with flow variables in finance. For internal management reporting purposes;
however, financial reports often are produced on a monthly, weekly and even daily
basis. Indeed, in much of the financial services industry, especially in securities
firms, daily closure of the books is customary, largely due to regulatory requirements.

Noting the time dimension associated with a given flow variable is critical to the
correct interpretation thereof, including using historical data to develop financial
forecasts and projections for future time periods.

Because stock variables are a point in time observations, their values may not be
representative of a company's normal financial position over a longer period, such as
during an entire fiscal quarter or fiscal year. This can be due either to random events
or to the deliberate manipulation of financial results by the company; a process
traditionally referred to as window dressing. This can include temporarily removing
certain debts or loans from the company's balance sheet as of the reporting date,
thereby enhancing the apparent financial strength of the firm. Using the point in time
stock variables on a balance sheet thus have potentially serious limitations as
indicators of financial condition.

Read more: Stock and Flow Variables Explained: A Closer Look at Apple |
Investopedia http://www.investopedia.com/articles/investing/011916/stock-and-flow-
variables-explained-closer-look-apple.asp#ixzz4vjysswGW

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