UNDERSTANDING
FINANCIAL
STATEMENTS
BASIC OBJECTIVES
• Accounting Basics
• Types of Financial
Statements
• What do all these numbers
mean?
ASSETS = LIABILITIES + EQUITY
Assets – Things that a company owns that have
value. (Cash, inventory, plants,
equipment, investments, trademarks)
Liabilities – Amounts of money that a company
owes to others. (Accounts payable,
loans, payroll owed to employees, taxes
owed)
Equity – Money left if a company
sold all assets & paid all liabilities
(Net worth, capital)
CURRENT OR LONG TERM
Assets
Can it be
converted to
cash in less
than 1 year?
Liabilities
Is it expected
to be paid in
less than a
year?
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
• Common set of standards used to compile
financial statements
• Creates at least a minimum of consistency
• Must be used to report financial statements to
the public
• Requires assets to be valued at their purchase
price, not at their market value
• Requires use of accrual accounting method
ACCRUAL VS. CASH
METHODS
Cash method
• Recognizes revenues when cash is
received & expenses when they are
paid
• Does not recognize accounts
receivable or accounts payable
• Simple to maintain
• Bank account shows the exact amount
of resources available
• Income is not taxed until it’s in the bank
ACCRUAL VS. CASH
METHODS
Accrual method
• Revenues and expenses are recorded
when they earned
• Most commonly used method
• Gives a more realistic idea of income &
expenses during a period of time
• Doesn’t provide awareness of cash
flow
TYPES OF FINANCIAL
STATEMENTS
• Balance Sheet
• Income Statement
• Cash Flows Statement
BALANCE SHEET
Gives a detailed snapshot of the financial health
of a company on a specific date
• Assets
• Listed on the left-side or at the top
• Listed in order of liquidity
• Liabilities
• Listed on the right-side or after the assets
• Listed in order of due date
• Equity
• Listed after the liabilities
• Totals of left and right sides must balance
INCOME STATEMENT
Shows revenue and expenses over a period of time
• Revenues or sales are shown at the top
• Total amount of money brought in
• Costs of Sales
• Amount spent to produce the goods or services
• Total of Revenue minus Cost of Sales is called Gross
Profit
• Operating Costs are deducted from Gross Profit
• Includes costs to support operations
• Includes administration, marketing, research
• Income Tax is deducted from Operating Profit
• Net profit is what’s left after all deductions
CASH FLOWS STATEMENT
Reports the inflows and outflows of cash for a period of time
• Will show whether the company generated cash
• Reorders information from the balance sheet & income
statement
• Operating activities
• Reconciles net income to the actual cash received or
used
• Adjust for non-cash items, receivables, and liabilities
• Investing Activities
• Financing Activities
• Bottom line reflects net change in cash for the period
• A cash flow forecast will show whether cash balances are
sufficient
OTHER THINGS TO CONSIDER
• Comparisons to historical statements can be very
helpful
• The creation of financial statements is an art not a
science
• Financial Statements alone don’t tell you everything
about the condition of a company
• There are many industry ratios and calculations that
will help to evaluate financial strengths and
weaknesses
• Some companies are required to have their financial
statements audited
• Footnotes provide lot of other information
• Included opinions, analysis, and other disclosures