Image by sylvdoanx via FlickrI can't count the number of times I've made fun of accountants (Yes - I'm sorry but I do come from a Marketing and Finance background and you guys get a couple of shots in on us too :) It's all in good fun)
The point is, lately I've actually revisited accounting and some of those liquidity, profitability, solvency ratios and analysis of financial statements. Honestly, this time around I find it so much easier to understand and it's a lot more applicable to my business situation. When I analyze my own financial statements what would I say about my company? Is it doing well? Would/should an investor put money into it based on the analysis? I'm sure investors go beyond just looking at the financial statements to decide whether to invest, but it is still one of the criteria that they look at.
For all you business/commerce kids. Remember how financial statements seemed like endless memorization of ratios and elements of the financial statements? If you spend some time running your own business big or small, you'll quickly find that it's quite easy to understand when applied to the real world.
Profit/Loss (statement of earnings) = Revenues - Expenses.
Statement of Retained Earnings: What you have right now in RE + the Net Earnings - Dividends you paid out = Your new balance (it's just like a bank statement!)
Balance Sheet: Really? Just make it balance. Expenses aren't in here. Just stuff that you own, owe, confirmed that you will receive, and confirmed that you will pay.
Cashflow Statement: Three ways to use/get money in a business - operating activities, investing activities, and financing activities. All things having to do with getting money into your business is under financing; all things having to do with your company buying/investing in hard assets is under investing activities, everything else - operating.
Alright accountants, don't give me hell just yet, these are just some easy guidelines I'm providing, I'm sure you guys will say there's a deeper science to this. This summary is for all of us who aren't accountants.
So there you have it. Financial statements summarized in a blog post :)