Understanding Financial Statements – A Guide for Non-Accountants

Understanding Financial Statements – A Guide for Non-Accountants

Financial statements provide vital insight into how a company operates. They show us the amount of revenue generated, costs associated with producing and delivering said revenues and how effectively the money used.

Non-financial managers need to understand reports in order to effectively lead their companies, which Upaca Gurukul helps non-financial managers do by equipping them with the knowledge and understanding required.

What are Financial Statements?

Financial statements are formal records that detail a business’s activities and financial position. Investors, lenders, and others use financial statements as a resource to gauge past performance as well as potential future prospects of an entity.

An income statement illustrates a company’s annual earnings and expenditures over time, such as sales revenue, costs of goods sold, operating expenses, returns/allowances/amortization/depreciation etc. Net income is calculated after subtracting these items from gross revenues and deducting all expenses and return/allowances/amortization etc. from gross revenues.

Assets are resources owned by a company which will have future economic benefits; examples include cash, accounts receivable and equipment. Liabilities represent obligations a company owes in the form of current (obligations due within one year) or long-term liabilities that come due over several years. Shareholder’s equity represents how much owners have invested into the company as investments.

The Income Statement

An income statement provides valuable insight into a company’s business activities over time. It contains details regarding revenue and operating expenses as well as any gains or losses. Ultimately, net income is determined as total revenue minus total expenses.

Financial statements can be utilized by both insiders and externals alike in evaluating a company. Investors utilize them to judge its investment value and creditworthiness; internally they’re used by staff members and executives to identify ways in which profits can be increased.

Accountants typically organize items on an income statement into separate sections that divide up operating revenue and expenses from non-operating activities, taxes and extraordinary items. They use their judgement to find the most logical breakdown for each item – for instance they might report depreciation as percentage of sales rather than as a flat dollar figure; this process is known as vertical analysis.

The Balance Sheet

Balance Sheets provide an accurate representation of a company’s financial health at any point in time, using assets equal liabilities plus shareholders’ equity as its basic formula.

Assets on the left side of a financial statement represent all that a company owns, such as cash, inventory, property and investments. Liabilities include things such as debts owed to suppliers as well as rent payments and payroll costs; owners’ equity remains after these liabilities have been met.

Accountants arrange accounts on a balance sheet according to how liquid they are, starting with those most liquid (current) before moving onto less-liquid ones (non-current). For instance, Apple’s latest balance sheet shows cash and cash equivalents, trade receivables, accounts payable as current assets; noncurrent assets comprise plant, property equipment and intangible assets. Each account is further categorize based on how quickly its conversion into cash can occur – this information helps accountants calculate various ratios.

The Cash Flow Statement

Cash flow statements provide a snapshot of cash and cash equivalents coming in and going out over time, serving as one of three primary financial statements issued by accountants to business owners, entrepreneurs, and investors to measure a company’s financial health.

The initial section of a cash flow statement covers operating activities. This demonstrates a company’s cash influx from sales and cash outgoing payments for supplies, taxes and staff salaries. Depending on how the statement is designed, this section may also include non-cash items like depreciation or changes in asset values.

The second section explores cash flows from investing activities, detailing how much a company invested in new assets such as machinery or property and sold off existing investments for profit. Financing activities are also covered, including sources such as investors and banks as well as dividend payments or equity repurchase payments.