Understanding financial statements is crucial for students aspiring to start a career in accountancy. When you can interpret the financial data, you can identify risks and opportunities to employ relevant business strategies. Financial experts are well aware of the interpretation of financial statements but not every business person can extract relevant knowledge to make a business decision from these statements.
Entrepreneurs and investors need to understand financial statements so that they can save themselves from potential risks and avail market opportunities. Oftentimes, multinational firms hire accountants and financial experts to guide them in their business strategy. If you also want to learn but you are new to financial statements then this comprehensive guide is going to help you a lot.
Understanding Financial Statements
Being an online accounting student, you should know how to read and prepare financial statements. It is the basis of starting a career in accounting without which you can not make informed decisions. It is not only helpful in academics but also in professional life. Knowing the financial statements helps in guiding the business strategies and identifying the potential risks to mitigate them effectively. Following are the 4 main financial statements crucial to understand by online accounting students.
- Balance Sheet
The balance sheet tells about the value of the company. It exhibits the resources of the company and how they were financed. Three main elements of a balance sheet are
- Assets: The quantified resources of the company
- Liabilities: The company’s debts, payroll expenses, payables, taxes etc.
- Owner’s Equity: Capital investment by owners or other shareholders
The equation to compute the returns and capital is Assets = Liabilities + Owner’s Equity. Assets must be equal to the sum of liabilities and equity of the company. If you have been thinking about starting your career in accounting, you will come across this equation quite often.
- Income statement
An income statement is also known as a profit and loss statement. As the name suggests, it tells about the company’s income, expenses, gains, and losses.
It can be quarterly or annually and tells about the company’s financial performance in a given period. The computation of the profit and loss is done to know whether the company bear a loss or earns a profit. The main components of the income statement are:
- Revenue
- Expenses
- Cost of goods sold
- Gross Profit
- Operating income
- Income before tax
- Net Income
- EPS
- Depreciation
- EBITDA: Earnings before interest, taxes, depreciation, and amortisation
The accounts department and investors repeatedly review income statements to make informed decisions for the future. So, being an accounting student, you should be able to interpret this important statement.
- Cash Flow Statement
The cash flow statement shows the inflow and outflow of cash and cash equivalences of the company. It determines the ability of the company to operate with the help of cash. There are three main parts of a cash flow statement:
- Cash Flow From Operating Activities
It is the cash which is generated by the operating activities of the company such as revenue generation, expenses, funding working capital
- Cash Flow From Investing Activities
It is the cash which is generated by the investing activities of the company such as purchasing or selling assets either physical or non-physical
- Cash Flow From Financing Activities
It is the cash which is generated by the financing activities of the company such as equity or debt financing
Annual Report
An annual report is a comprehensive document to inform the stakeholders about the company’s performance in the previous year. Other than the company’s performance, it includes a letter from the CEO, financial data of the company, and short-term and long-term goals in the coming years. It includes the mission, vision, risks, opportunities and corporate agreements to inform the readers about the company’s financial health and status. Henceforth, it is an important and detailed document for the company’s current shareholders and potential investors.
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