Understanding Financial Statements
Understanding Financial Statements Part 1
This series of posts will give you an understanding of Financial Statements ASAP. This knowledge can be highly impactful for the quality of your career, job prospects, and life.
Everyone should have a basic understanding of Financial Statements: what they are and what information they provide. It’s a competency that can open up opportunities and vistas that are closed off otherwise. Financial Statements are the basic language of money and business.
Executives routinely share and discuss financial data with marketing, operations, and other direct reports and personnel. But how much do you really understand about finance and the numbers? A recent investigation into this question concluded even most managers don’t understand enough to be useful. Check out this quick test to see how you stack up.
Three Main Financial Statements
There are three main financial statements and they are linked together to provide a picture of the financial position and health of an enterprise. They are the end product of accounting meaning they are the reports generated by accounting covering all of the transactions of a company.
The three basic financial statements are the
• Balance Sheet: which shows firm’s assets, liabilities, and net worth on a stated date
• Income Statement, also called profit & loss statement or simply the P&L: which shows how the net income of the firm is arrived at over a stated period, and
• Cash Flow Statement: which shows the inflows and outflows of cash due to the firm’s activities during a stated period.
Knowing how to read and understand financial statements is a business skill you can’t ignore. It can help working your way up the corporate ladder by communicating with others in your company and understanding the big picture.
When you are thinking about possibly changing jobs and working for a company you can check their financials and make sure they are a healthy organization. If you are considering starting your own company you will need to have financials prepared by your accountant in order to talk to investors, banks and vendors.
If you want to invest wisely in the stock market, analyze the competition or benchmark your performance, you can look up the financials of any publicly traded company at the Securities and Exchange Commission website’s’ EDGAR filings and get an idea of how they are doing. Check out any public company’s most recent 10K filing there.
This will be a series of posts that will go over each of the financial statements individually and how they are interrelated. The next post will go over the Balance Sheet. Stick with me on this series of posts and level up your business chops. Please leave any comments!
If you are interested in a thorough understanding of these concepts check out my books Learn Accounting Fast! or Reading and Understanding Financial Statements.
