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Walsh Enterprises Business Advisors

Financials for Dummies

A Guide to Financial Statements for the Beginner


Financial Statements for Dummies

• I’ve written many articles on Business, Economy,


and Career. By far the most popular article has been
“Financial Statements for Dummies”.

• I have therefore decided to create a more expanded


version and post it here for your use.

Al Walsh
Financial Statements for Dummies
Paraphrasing the popular "how-to" books, this article is a basic primer on
understanding Financial Statements.

It's scary to me how many business managers can't read their own company's
Financials. Even some business owners barely understand their own Financials
(and, scarily enough, some Finance people too).

Any manager who wants to advance beyond the status of “Junior Flunkie" should
have at least a basic understanding.

I'm not going to get involved in Double-entry Accounting and Debits & Credits. 
That would just confuse you and it's unnecessary for this discussion.  If you have
no idea what I was just talking about, accountants post two entries for every
transaction; a debit and a credit.  It's called double-entry accounting.  Enough said.

All you Accountants out there can now close the article and go away.  This is basic
stuff.

So here goes:

The two basic Financial Statements are the Balance Sheet and The Income
Statement (or Profit & Loss Statement: P&L).

Let's talk about the Balance Sheet first (sample enclosed):


Sample Balance Sheet

Assets: Liabilities:
Cash 1,000,000.00 Current Liabilities;
Accounts Receivable 5,000,000.00 Accounts Payable 4,000,000.00
Inventory 7,000,000.00 Bank Debt, Current Portion 1,000,000.00
Car Loan, Current Portion 10,000.00
Capital Assets: Total Current Liabilities 5,010,000.00
Land & Buildings 20,000,000.00
Equipment 8,000,000.00 Long-Term Liabilities:
Total Capital Assets 28,000,000.00 Bank Debt, Long-Term Portion 5,000,000.00
Car Loan, Long-Term Portion 20,000.00
Prepaid Insurance 500,000.00 Total Long-Term Liabilities 5,020,000.00
Total Liabilities 10,030,000.00

Owners Equity
Stock 20,000,000.00
Less: Dividends Paid 400,000.00
Current Year Income/(Loss) 700,000.00
Retained Earnings 10,370,000.00
Total Owners Equity 31,470,000.00

---------------- ---------------
Total Assets 41,500,000.00 Total Liabilities & Equity (Net Worth) 41,500,000.00
========= =========
The Balance Sheet is a reflection of the financial makeup and standing of the
company at any point in time - usually at each month-end.  It is a roll-up of every
transaction the company's done from day-one to present.  It reflects EVERYTHING
that's happened; including Profit or Loss (more on that later).

The Balance Sheet is made up of three broad categories:  Assets    


Assets  Liabilities   
Liabilities
and    Net Worth (or Owners' Equity).  The total of Assets always equals the total of
Liabilities plus Net Worth.  (Assets = Liabilities + Net Worth)

Assets = The things the company owns:  Cash, Accounts Receivable, Inventory,
Land, Equipment, etc.  If you prepay insurance, or some other purchase, you would
also post an asset entry here.

Liabilities = The debts of the company:  Accounts Payable, Bank Debt, Car Loans,
etc.  They're split up between Current Liabilities (the money due within the current
fiscal year)  and Long-Term Debt (Amounts due beyond the current fiscal year).

Last, we have Net Worth (Owners Equity).

Net Worth =  Any money invested in the company (think stock)   -minus-   any
dividends paid    -plus-   the net total of all annual profits (negative for losses) since
day one (called Retained Earnings)      plus   the total of profits (negative for losses)
in the current year.

Not too difficult, huh?   Now let's talk about the Income Statement (P&L) (sample
enclosed):
Sample Income Statement (Profit & Loss Statement)

Sales Revenue 10,000,000.00


Cost of Goods Sold 7,000,000.00
Gross Profit 3,000,000.00

General & Administrative Expense:


Payroll 1,100,000.00
Rent 700,000.00
Telephone 70,000.00
Supplies 30,000.00
Total General & Administrative Expense 1,900,000.00

Interest Expense 20,000.00

Income/(Loss) Before Income Tax 1,080,000.00

Income Tax 380,000.00

Net Income/(Loss) After Income Tax 700,000.00


=========
The Income Statement is a reflection of all Revenues and Expenses for the current year;
in other words, the company's profitability.

The bottom-line number is Net Profit,


Profit which = all Revenues less all Expenses.

Remember I said earlier that the Balance Sheet reflects ALL transactions of the
company? 
The Net Profit total of the Income Statement flows to the Balance Sheet as the total of
Current Year Profits in the Net Worth section.  At each year-end, the Income Statement
zeros out to begin a new year.  On the Balance Sheet, the current year profit in the Net
Worth section transfers to the Retained Earnings total and the current year profit value
goes back to zero for the start of a new year.  If you're confused, read this a couple
times and you'll get the hang of it.  This is where beginning Accounting students start
getting glaze-eyed, but it's not that tough. Just sleep on it.

That basically sums up your two key Financial Statements.  There are others, but unless
you're heavily involved in the numbers you don't have to know those.  With an
understanding of these two, you can get a fair handle on a company's status.

I didn't get into some of the more complex stuff like Capital Purchases vs. Expenses,
Depreciation, and some of the more complex accounting transactions, but that's okay.
That's a set of topics for another day.

If you're still confused, go back to the Sample Financials and find the categories
mentioned in this article.  It will come to you.

I hope this helps.

Al Walsh