Trigger 7: How to interpret financial data

 1.             What is balance sheet?

"The accounting balance sheet is one of the major financial statements used by accountants and business owners. (The other major financial statements are the income statement, statement of cash flows, and statement of stockholders' equity) The balance sheet is also referred to as the statement of financial position." 

http://www.accountingcoach.com/balance-sheet/explanation

• Includes: Assets

• Liabilities

• Owner's (Stockholders') Equity

Networth: Assets-liabilities= Equity

Creating a balance sheet:

First list current assets (to be used up in a year) than list investments, then property, plant and equipment, lastly list intangible assets, other assets. = ASSETS

Secondly list current liabilities (to be satisfied within a year), long term liabilities. Thirdly list stockholders’ equity = LIABILITIES + OWNERS EQUITY

 2.       Income statement

"The income statement is important because it shows the profitability of a company during the time interval specified in its heading. The period of time that the statement covers is chosen by the business and will vary.

Keep in mind that the income statement shows revenues, expenses, gains, and losses; it does not show cash receipts (money you receive) nor cash disbursements (money you pay out).

People pay attention to the profitability of a company for many reasons. For example, if a company was not able to operate profitably—the bottom line of the income statement indicates a net loss—a banker/lender/creditor may be hesitant to extend additional credit to the company. On the other hand, a company that has operated profitably—the bottom line of the income statement indicates a net income—demonstrated its ability to use borrowed and invested funds in a successful manner. A company's ability to operate profitably is important to current lenders and investors, potential lenders and investors, company management, competitors, government agencies, labor unions, and others."

http://www.accountingcoach.com/income-statement/explanation

Revenue- Cost of goods sold (COGS)= Gross income

Non direct costs (rent, salaries, marketing) =Selling, General and Administrative costs (SG&A’s)

Gross income- SG&A’s= Operating income

Operating income -tax = Net income

Balance sheet vs Income statement

"The major difference between them is this: the balance sheet is essentially a snapshot, while the income statement is a movie. In other words, the balance sheet shows what you own (assets) and what you owe (liabilities) at a moment in time (most often as of December 31). The income statement shows what happens over a period of time (usually a year): what comes in, what goes out, and what’s left over at the end."

http://articles.bplans.com/how-to-read-an-income-statement/

 

3.       Ways to get familiar with business accounting:

There are numerous books about the subject, but I would recommend browsing the web. Youtube has over 90 000 results on the words “what is income statement”. The videos are higly educational and explain everything in a simple way. I have included some of the basic videos in the previous segments.

In addition to watching youtube, there are several sites that give info on how to do basic accounting. There are free courses and courses that are payed for.

When searching the web, it is always important to also learn about the legislation behind accounting in a specific country, in order to avoid any future problems.