Understanding financial statements

Geni Whitehouse
Geni WhitehouseCountess of Communication
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
Understanding
Financial Statements
By Geni Whitehouse, CPA
Countess of Communication
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
Imagine your business is a tree.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
Imagine your business is a tree.
A fruit-bearing tree.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
Imagine your business is a tree.
A fruit-bearing tree.
Like an apple tree.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
This is your business.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
The income statement measures the fruits of
your business efforts.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
Like a tree, your business produces an
annual yield...
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
...that gets reset every year.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
The Income Statement
starts at zero at the beginning
of every year
and measures the
annual yield.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
Profit =
Revenue – Expenses
Above the line
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Department Focus
Profit =
Revenue – Expenses
Above the line
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
Department Focus
Bottom Line
Profit =
Revenue – Expenses
Above the line
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
At the end of each year,
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
At the end of each year,
net earnings (or Net Income) is
added to
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
At the end of each year,
net earnings (or Net Income) is
added to
Retained Earnings on the
Balance Sheet.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
At the end of each year,
net earnings (or Net Income) is
added to
Retained Earnings on the
Balance Sheet.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
At the end of each year,
net earnings (or Net Income) is
added to
Retained Earnings on the
Balance Sheet.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
The Balance Sheet is a picture in time.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
The Balance Sheet is a picture in time.
It measures the cumulative result of your business
efforts.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
The Balance Sheet is a picture in time.
It measures the cumulative result of your business
efforts.
It sustains your business
over the long haul.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
A tree can not bear fruit
without the support of a strong trunk.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
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.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
The Balance Sheet measures what you own
and what you owe.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
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.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
The equity section is the difference between
the two.
Assets – Liabilities = Equity
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
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.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
If you slice open the trunk of a tree,
you can read the story
of each year
in its life.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
You will find lean years...
...with little or no Net Income.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
And strong years...
...with plentiful Net Income.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
Those rings are like the equity
section of the Balance Sheet.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
Those rings are like the equity
section of the Balance Sheet.
Accumulated Retained Earnings
=
Equity
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
Equity =
Assets – Liabilities
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
What
you
Own
Equity =
Assets – Liabilities
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
What
you
Own
What
you
Owe
Equity =
Assets – Liabilities
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
What
you
Own
What
you
Owe
Accumulated Earnings
Equity =
Assets – Liabilities
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
Without water, no tree can survive for long.
No business can survive without cash.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
The Cash Flow Statement
shows
where the water went
in your business.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
How much cash
was consumed
by the Income
Statement?
Income
Statement
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
How much cash
was consumed
by the Income
Statement?
Income
Statement
Balance
Sheet
How much cash
was consumed
in growing
the Balance Sheet?
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
The Cash Flow Statement
connects
the Income Statement
to
the Balance Sheet.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
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?”
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
...keeps the business
running
Operating cash
flow ...
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
...keeps the business
running
Operating cash
flow ...
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
Net Increase (Decrease) (3,700)
... To cash in the
bank.
From Net
Income ...
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
Income
Statement
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
Income
Statement
Balance
Sheet
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
Income
Statement
Balance
Sheet
Statement of
Cash Flows
Success in
business
requires a
focus on all
three
financial
statements.
@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
Concepts by Geni Whitehouse
Even 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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Understanding financial statements