Introductory Lesson

Transcript Below

The first part of this webinar is a basic overview of accounting and financial statements. We will cover the balance sheet, the income statement, and the cash flow statement. We will then get into some of the basics of financial statement analysis that you can use to review financial statements and glean meaning from the balance sheet, the income statement, and the cash flow statement. flow statement. First, you need a basic understanding of those statements to begin the analysis.

What is financial statement analysis? Essentially, financial statement analysis is the process by which business owners, managers, and even administrative professionals, who have some financial responsibility in their departments or for their company can take the financial company we’ll perform in the future.

I tell my clients that financial statements themselves themselves do not provide any answers. What they provide are questions.

Why did revenue decrease from the prior period? Why did certain expenses increase from the prior year? Why is working capital so low?

What does it mean for our company that our debt -to -equity ratio doesn’t match other companies in the hour end? Those are just a few of the questions provided by the financial statements.

Answering those questions will begin your exploration and research. The goal of financial statement analysis is to find answers to these questions.

There are two critical factors. to a business’s survival. The first is profitability. The second is solvency. Profitability is the ability to generate profits in the company or your department or division.

Solvency relates to cash flow. Does the company have enough cash to meet its obligations? Is there sufficient cash? to pay its debts? Pay its accounts payable from vendors, notes payable, bank loans, or pay dividends to its investors? Those are all obligations that require a company to have available cash.

In a little bit we’re going to be discussing ratios. Financial Ratio as tools of financial analysis, will address profitability and solvency concerns.

Financial statement analysis can be summarized by the three Rs. Now you know that there are three R’s in education.

They’re reading, writing, writing, and arithmetic. That’s what I learned in elementary school about 120 years ago.

I don’t know who developed those three Rs, particularly because they relate to education. How did someone arrive at arithmetic? In the statement analysis, there are also also three Rs. All three of these words begin with the letter R. They are recording, reporting, and reviewing. Recording simply means entering the transactions that occur in a business in some kind of ledger.

It doesn’t matter if you are a ledger. the transactions are recorded manually or on a computer. Today, most accounting is done using an Excel spreadsheet or one of the hundreds of computer accounting programs currently available.

The goal of recording all financial transactions is to prepare summaries of those transactions. transactions. Reporting is the process of producing financial statements that include the balance sheet, the income statement, and the cash flow statement. The most important process is reviewing financial statements and performing a financial statement analysis.

Before we begin our financial analysis, we must know the company’s strategy, objectives and goals.

What is the company’s mission statement? What are the company’s metrics? What profit level is the company trying to achieve? Is the company working to obtain a percentage increase or a set dollar amount of increase?

Understanding the nature of the industry in which the business is a part is critical to our analysis. Each industry utilizes its own set of accounting principles that must be adhered to when recording its transactions.

The forestry products industry will have accounting principles quite different from a service industry. as developed and continues to develop principles on how transactions are to be recorded and reported on the financial statements.

And each industry has its own set of gaps. Finally, the overall state of the economy is the foundation on which we can use the financial statements of our particular company to compare against other business in the same industry and globally to understand the financial health of our business in comparison to the economy as a whole.

For example, the period 2008 through 2012 we were in a recession. That recession was devastating to business business. in the retail and construction industries.