Understanding Financial Statements
If there is one skill amateur accounting professionals need to display to prove their mettle, it is their proficiency in understanding financial statements. These fundamental statements create a comprehensive picture of a business’ current situation and provide enough data for analysts to determine the future trends and help managers plan accordingly. However, since these are quite diverse documents, demanding command on a variety of financial characteristics of the business, we have built this page to help you fully understand the basics of financial reporting and know what to expect from these documents.
Fundamentals of Financial Report Reading
Fundamentally, financial report reading comprises the ability to read, comprehend, and analyze the following financial statements:
BALANCE SHEET: Sometimes referred to as the Statement of Financial Position, the balance sheet is where you truly begin understanding financial statements. It is made to provide the current state of the business’ assets, equity and liabilities. This statement also helps the reader calculate the current business net worth.
The balance sheet is easy enough to read once you learn what information goes where. In an overview, the statement is devised to display your business’ assets on the left side of the sheet and its liabilities and equity on the right side. All accounts falling under each of these categories have to be listed with their specific value in the currency the country’s economy follows.
Assets are to the left in this statement. These are resources that the business entity legally owns. In the balance sheet, they are listed based on their organic conversion to cash and how soon that might happen. Current assets are, thus, listed on top, listing assets that the business expects to turn into cash within the coming fiscal year. In the bottom, we have a list of your fixed assets, which are required to operate the business and are not expected to be sold or converted into cash.
To the right side of the balance sheet, liabilities are listed over equity, on the basis of their due dates. Liabilities are divided into two categories and reported as such, namely current and long-term. Similarly, shareholders’ equity is listed below to represent the investments and your business’ profit or loss.
INCOME STATEMENT: The next item to consider for better understanding financial statements is the income statement.
As the name suggests, the document reports your business’ earnings for a given period. Since you want to determine your net income, the document begins with stating your total sales for the period to the left side and deducting expenses incurred underneath. This leads you to a final figure about what your business earned during the reporting period.
The next step is to deduct cost of goods sold, which is the total amount your business spent on creating the products or services you sold. Deducting the resulting number from your net income gives you the gross profit. Then you deduct operating expenses, depreciation, interest expenses, and taxes to arrive at the moment of truth and learn if your business made a net profit or retained net losses.
STATEMENT OF CASH FLOW: The movement of your cash during the reporting period is very important for fully understanding financial statements. It allows you to provide transparent reports, which is why a separate financial statement is made to list these movements. It is called the statement of cash flow. The statement reports the flow of cash under three specific categories, including investing, operation, and financing.
Other documents are also used by many kinds of businesses depending upon the legal requirements of authorities, such as Form 10K, statement of change in equity, notes to financial statements, etc.
Getting Financial Reporting Training
For all those professionals aiming to build a career in the many specialized fields of accounting, financial reporting training is a must. The first step towards this education is understanding financial statements and what information they include. With this information amateur accounting professionals can establish a firm foundation upon which they can build their skill to craft these financial reports with confidence.
With any form of formal financial reporting training, you can improve the process of professional growth and boost your career goals with the right job opportunities. As a renowned institute committed to digital education, we have a number of programs that we are developing to give accounting professionals a comprehensive platform for financial reporting training.
Our Dedicated Products for Understanding financial statements
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