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?

G A A P

• 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

GENERALLYACCEPTED ACCOUNTING PRINCIPLES

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