Book Summary Preview : How to Use Financial Statements

The Big Idea

Reading and understanding Financial Statements has always been considered a difficult task to most. These days, financial statements are not solely for accountants, economists and businessmen. Knowing how to read and understand financial statements can help you know your company better, can help you plan investments, spot industry trends and can help you find a better job.

You do not need to be an accountant to use the information on a basic statement. All you need are a few basic concepts. This book gives you a clear and simple way of reading and understanding financial statements. It puts complex ideas into plain and easy to understand language.

Questions of Loyalty

What Are Financial Statements and What Do They Tell Us

Financial statements are necessary sources of information about a company. It is used to analyze a company's past, present and future performance.

Financial statements consist of three separate but interrelated topics:

• Statement of financial position or balance sheet
• Gives a snapshot of the company's financial position at any given time.
• Lists down the company's assets against liabilities and owner equity. Assets should always equal liabilities plus owner equity.

• Profit or loss or the income statement
• Shows how profitable a company is at any given time.
• Shows revenues minus expenses to come up with net profit.

• Statement of cash flow
• Tells how much cash a company made, and where it went.

Who Uses Financial Statements and What Do They Look For

Primary users of financial statements are:

• Owners/investors - places more emphasis on the profit side of the business; will focus most likely on the income statement
• Lenders - tends to give more importance to balance sheets and cash flow.
• Managers - uses financial statements to gauge the performance of the company or business.
• Suppliers - concerned with the ability of the company to make payments. They are inclined to look at cash flow and how "liquid" a company is.
• Customers - looks into a company's financial strength.
• Attorneys and litigants - interested in the client's ability to pay. Financial statements are also used to determine who will be named in a law suit and how much to demand.
• Employees and jobseekers - employees need to know if the company can provide the job and employment security he needs.

An Introduction to Accrual Concept

Financial statements are based on the concept of Accrual Accounting. It is important to understand this concept of recognizing revenue and expense when you read and analyze financial statements.

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