{"id":455,"date":"2019-06-11T12:06:55","date_gmt":"2019-06-11T06:36:55","guid":{"rendered":"https:\/\/editor.eduplusnow.com\/?p=455"},"modified":"2019-06-11T12:06:55","modified_gmt":"2019-06-11T06:36:55","slug":"a-newbies-guide-to-understanding-financial-statements","status":"publish","type":"post","link":"https:\/\/blog.eduplusnow.com\/blog\/a-newbies-guide-to-understanding-financial-statements\/","title":{"rendered":"A Newbie\u2019s Guide to Understanding Financial Statements"},"content":{"rendered":"<h1>A Newbie\u2019s Guide to Understanding Financial Statements<\/h1>\n<hr \/>\n<p><span style=\"font-weight: 400;\">Financial statements are crucial for any business. They provide fundamental information that helps business owners and other stakeholders understand the financial position and cash flows of their businesses. The stakeholders include creditors, analysts, investors, business partners, shareholders, and customers. Understanding the basic financial statements provide a window into the financial health of the company.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For financial reporting, companies prepare three main financial statements, including the income statement, balance sheet, and cash flow statement. In this article, we examine these statements in detail and how they summarize the financial information of the business.<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Decoding the Types of Financial Statements<\/span><\/h3>\n<h6><span style=\"font-weight: 400;\">The standard financial statements that every company maintains include:<\/span><\/h6>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Balance Sheet<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Income Statement<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Statement of Cash Flows<br \/>\n<\/span><\/li>\n<\/ul>\n<h5><strong>Balance Sheet<\/strong><\/h5>\n<p><img loading=\"lazy\" class=\"alignnone size-full wp-image-456\" src=\"https:\/\/blog.eduplusnow.com\/blog\/wp-content\/uploads\/2019\/06\/Screen-Shot-2019-06-11-at-11.39.49-AM.png\" alt=\"\" width=\"1203\" height=\"534\" srcset=\"https:\/\/blog.eduplusnow.com\/blog\/wp-content\/uploads\/2019\/06\/Screen-Shot-2019-06-11-at-11.39.49-AM.png 1203w, https:\/\/blog.eduplusnow.com\/blog\/wp-content\/uploads\/2019\/06\/Screen-Shot-2019-06-11-at-11.39.49-AM-1200x533.png 1200w, https:\/\/blog.eduplusnow.com\/blog\/wp-content\/uploads\/2019\/06\/Screen-Shot-2019-06-11-at-11.39.49-AM-300x133.png 300w, https:\/\/blog.eduplusnow.com\/blog\/wp-content\/uploads\/2019\/06\/Screen-Shot-2019-06-11-at-11.39.49-AM-768x341.png 768w, https:\/\/blog.eduplusnow.com\/blog\/wp-content\/uploads\/2019\/06\/Screen-Shot-2019-06-11-at-11.39.49-AM-1024x455.png 1024w\" sizes=\"(max-width: 1203px) 100vw, 1203px\" \/><\/p>\n<p style=\"text-align: center;\"><a href=\"https:\/\/www.accountingcoach.com\/balance-sheet\/explanation\"><span style=\"font-weight: 400;\">Source<\/span><\/a><\/p>\n<p><span style=\"font-weight: 400;\">Also known as the Statement of Financial Position, a Balance Sheet provides an overview of a company\u2019s assets, liabilities, and stockholders\u2019 equity. It provides a picture of the company\u2019s financial health at a certain point in time. The balance sheet is used to analyze how companies are funding assets and operations as well as an overview of investors in the company.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The following formula summarizes a company\u2019s balance sheet:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Assets = Liabilities + Shareholders\u2019 Equity<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In the balance sheet, assets refer to cash and cash equivalents, accounts receivables, and inventory. The term liabilities pertain to debt, wages payable, dividends payable, rent, tax, and utilities. Shareholders\u2019 equity refers to the total assets of the company minus its liabilities. In case the company is liquidated, this is the amount that would be paid to the shareholders after the debts are paid and the assets liquidated.<\/span><\/p>\n<h4><strong>Income Statement<\/strong><\/h4>\n<figure style=\"text-align: center;\"><img loading=\"lazy\" class=\"alignnone size-full wp-image-458\" src=\"https:\/\/blog.eduplusnow.com\/blog\/wp-content\/uploads\/2019\/06\/Screen-Shot-2019-06-11-at-11.45.36-AM.png\" alt=\"\" width=\"515\" height=\"433\" srcset=\"https:\/\/blog.eduplusnow.com\/blog\/wp-content\/uploads\/2019\/06\/Screen-Shot-2019-06-11-at-11.45.36-AM.png 515w, https:\/\/blog.eduplusnow.com\/blog\/wp-content\/uploads\/2019\/06\/Screen-Shot-2019-06-11-at-11.45.36-AM-300x252.png 300w\" sizes=\"(max-width: 515px) 100vw, 515px\" \/><\/figure>\n<p style=\"text-align: center;\"><a href=\"https:\/\/www.investopedia.com\/terms\/i\/incomestatement.asp\"><span style=\"font-weight: 400;\">Source<\/span><\/a><\/p>\n<p><span style=\"font-weight: 400;\">The Income Statement, also known as the Profit and Loss Statement, lists the revenue and expenses and calculates the net earnings or losses. It provides an overview of the revenues, expenses, net income and the earnings per share. Unlike balance sheets, income statements provide the company&#8217;s financial performance in terms of net profit or loss over a specified period.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The income refers to what the business has earned over a period of time, including sales income, dividend, etc. Expenses include the costs incurred by a business over a specific time period such as rent, salaries of employees, depreciation, etc.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Following is the process of calculating the net earnings or loses in an income statement:<\/span><\/p>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The income statement displays the sales revenue at the top. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The sales return or sales discount is deducted to calculate the net sales. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The gross profit is calculated by subtracting the cost of goods sold from net sales. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">By deducting the operating expenses from the net sales, we get the Earnings Before Interest and Taxes (EBIT). <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">EBT or the Earnings Before Taxes is calculated by deducting the interest paid or interest charged.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">To calculate the net income, we deduct the income taxes of the period from the EBT.<\/span><\/li>\n<\/ol>\n<h4><strong>Statement of Cash Flows<\/strong><\/h4>\n<p><img loading=\"lazy\" class=\"alignnone size-full wp-image-459\" src=\"https:\/\/blog.eduplusnow.com\/blog\/wp-content\/uploads\/2019\/06\/Screen-Shot-2019-06-11-at-11.48.52-AM.png\" alt=\"\" width=\"751\" height=\"492\" srcset=\"https:\/\/blog.eduplusnow.com\/blog\/wp-content\/uploads\/2019\/06\/Screen-Shot-2019-06-11-at-11.48.52-AM.png 751w, https:\/\/blog.eduplusnow.com\/blog\/wp-content\/uploads\/2019\/06\/Screen-Shot-2019-06-11-at-11.48.52-AM-300x197.png 300w\" sizes=\"(max-width: 751px) 100vw, 751px\" \/><\/p>\n<p style=\"text-align: center;\"><a href=\"https:\/\/fitsmallbusiness.com\/create-cash-flow-statement-xero-course\/\"><span style=\"font-weight: 400;\">Source<\/span><\/a><\/p>\n<p><span style=\"font-weight: 400;\">The cash flow statement tracks the inflows and outflows of cash and bank balance over a period of time. Businesses generate cash flows from its core operations, investing activities, and financing activities.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">At the end of the year, companies prepare their financial statements in accordance with the accounting standards to prepare budgets and give stakeholders an overview of how the business is functioning. Businesses that are looking to borrow and raise capital for expansion also have to produce financial statements. This allows credit agencies to assess the position of the business as regards to the capacity of the entity to repay its short as well as long term liabilities.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">While financial statements are required for publicly traded companies, understanding financial statements are crucial for every business owner to assess the financial position for their company.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>A Newbie\u2019s Guide to Understanding Financial Statements Financial statements are crucial for any business. They provide fundamental information that helps business owners and other stakeholders understand the financial position and cash flows of their businesses. The stakeholders include creditors, analysts, investors, business partners, shareholders, and customers. Understanding the basic financial statements provide a window into &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/blog.eduplusnow.com\/blog\/a-newbies-guide-to-understanding-financial-statements\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;A Newbie\u2019s Guide to Understanding Financial Statements&#8221;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":460,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[2,3,21,23],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v16.0.2 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>A Newbie\u2019s Guide to Understanding Financial Statements<\/title>\n<meta name=\"description\" content=\"Financial statements are how business communicate their financial information to stakeholders. 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