understanding financial statements

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Understanding Financial Statements

By Geni Whitehouse, CPACountess of Communication

http://www.evenanerd.com/

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Imagine your business is a tree.




A fruit-bearing tree.




A fruit-bearing tree.

Like an apple tree.



This is your business.



The income statement measures the fruits of your business efforts.



Like a tree, your business produces an annual yield...



...that gets reset every year.



The Income Statement starts at zero at the beginningof every year

and measures the annual yield.



Profit = Revenue – Expenses

Above the line



Department Focus

Bottom Line

Profit = Revenue – Expenses

Above the line



At the end of each year,




net earnings (or Net Income) is added to




net earnings (or Net Income) is added to

Retained Earnings on the Balance Sheet.



The Balance Sheet is a picture in time.




It measures the cumulative result of your business efforts.




It measures the cumulative result of your business efforts.

It sustains your business over the long haul.



A tree can not bear fruit without the support of a strong trunk.



A business can not produce annual Net Income without a solid Balance Sheet.

A tree can not bear fruit without the support of a strong trunk.



The Balance Sheet measures what you own and what you owe.



The Balance Sheet measures what you own and what you owe.

What you own is called your Assets.

What you owe is called your Liabilities.



The equity section is the difference between the two.

Assets – Liabilities = Equity



The equity section is the difference between the two.

Assets – Liabilities = Equity

Equity approximates the net value of your

business.

Equity is sometimes called Net Worth.



If you slice open the trunk of a tree, you can read the story

of each year in its life.



You will find lean years...

...with little or no Net Income.



And strong years...

...with plentiful Net Income.



Those rings are like the equity section of the Balance Sheet.



Those rings are like the equity section of the Balance Sheet.

Accumulated Retained Earnings

=

Equity



Equity = Assets – Liabilities



What you Own




What you Own

What you Owe




What you Own

What you Owe

Accumulated Earnings




Without water, no tree can survive for long.

No business can survive without cash.



The Cash Flow Statement showswhere the water went in your business.



How much cash was consumed by the Income Statement?

Income Statement



How much cash was consumed by the Income Statement?

Income Statement

Balance Sheet

How much cashwas consumedin growing the Balance Sheet?



The Cash Flow Statement connects

the Income Statement to

the Balance Sheet.



The Cash Flow Statement connects

the Income Statement to

the Balance Sheet.

The answer is on the Statement of Cash Flows.

“If I produced Net Income this

year, where did the money go?”



Net Increase (Decrease) (3,700)



Net Increase (Decrease) (3,700)

...keeps the business running

Operating cash flow ...



Income Statement



Income Statement

Balance Sheet



Income Statement

Balance Sheet

Statement of Cash Flows

Success in business

requires a focus on all three financial

statements.


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Concepts by Geni WhitehouseEven a Nerd Can Be Heard

Artwork (if you can call it that) also by Geni Whitehouse.

www.evenanerd.com

The End



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