session 6: using financial statements

Since we hadn’t completely wrapped the previous session and it lead directly into what we were talking about this week, a recap was welcomed.
This is the magic formula:
A = L + (C-W) + (R-E)
or
Assets = Liabilities + (capital-withdrawals) + (revenue-expenses)
. EQUITY
Operators Equity is the worth of the company.
Liabilities is debt owed.
Do recall double entry accounting? With this formula, when entering something you must enter a complimentary, counter entry so everything stays balanced.

When analyzing financials, there are three statement types based on what information you require.
When asking “what’s it worth?” You need a balance sheet.
When asking “are we making money?” You need an income statement.
When asking “are we ok?” You need an cash flow statement.

The balance sheet is always dated. It represents a point in time reflecting the accounting formula above.
You’ll list your assets and total. Next, list your liabilities and total. Then, list your capital and retained earnings. What’s the total?

The income statement is over a period of time, like the past year. It’s also known as the profit/loss statement. This is where you list your revenue and expenses to calculate your income (which should compare to your retained earning on the balance sheet).
To take it a step further, an income statement may also include sales minus cost of goods (COGS) to give gross profits, then subtract operating expenses.

Maybe this sketch can help…













Cash flow statement is totally different. It looks at how much money is coming in when.
For an exercise in cash flow, click here.

Here's a tip: Always keep your columns lined up, right aligned.

We'll be covering more about cash flow at the beginning of the next session.