2. Financial Statement Analysis
Next hour or so…
Learn about the 3 major financial statements that all
organizations should use
How to read them and interpret data about them
What they say about an organization’s viability
How they are used to create additional data points
for analysis (ratios)
3. Three main financial statements:
Balance sheet Income statement Statement of Cash flows
4. All three are based
upon the accounting
equation
• The accounting equation balances
assets, liabilities and equity
• Can be expressed multiple ways but
normally:
• ASSETS = LIABILITIES + EQUITY
• ASSETS – LIABILITIES = EQUITY
• The goal is to balance expenses/costs
and assets/earnings in order to
understand VALUE
5. Assets
• Current Assets (Cash anything that can
be converted to cash easily like certain
investments, accounts receivable,
owed money)
• Fixed assets (Stuff that has value and
is used to run a business including
land, buildings, equipment, fixtures
etc.)
• Non-current assets (securities,
intellectual property, structured
payments)
7. Equity
• What’s left over after liabilities are
paid off
• Technically it is the owner’s claim
against the business or organization or
what they are entitled to should the
concern fail, collapse or cease to exist
• With a going concern (business still
operating) equity is increased by profit
or operational reductions and
decreased by losses or operational
increases
8. Three financial
statements
1. Balance sheet (assets against
liabilities at a moment in time)
2. Income statement (summary
of results of operations
(revenue and espenses) for a
year including
management/creation of all
assets and liabilities)
3. Statement of cash flows
(tracks the flow of cash in and
out of a business)
9. Solvency and
Liquidity
• Important concepts for evaluating a
business or organization’s financial
position
• Solvency means do they have enough
assets to meet liabilities?
• Liquidity means how much of their
assets are liquid/cash and can be
called upon to grow the business or be
used in an emergency?
• Liquidity and solvency are closely tied
to profitability since they indicate
inflows (income, operations) and
outflows (debt, liabilities, operations)
10. How do you determine a company’s
financial position?
• Read the statements themselves
• Check the balance sheet for assets
and liabilities
• Review the income statement to see
the trend in terms of sales and
income from operations, net income
• Look at the statement of cash flows
to see year end cash and change in
cash
• Use ratios to look for relationships
between portions of the statements
to draw deeper conclusions
11. Balance Sheet
Look at the following:
• Current assets
• Total Assets
• Current Liabilities
• Total liabilities
• Current compared to total is important in order to
determine short term compare to long term
• Give clues to solvency and liquidity
12. Income Statement
Look at:
• Revenue/total revenue
• Operating income (profit minus operating
expenses)
• Net income (total revenue minus total
expenses)
• Good to look at bot of these to “smooth out”
operational events that may be one time
• Shows is the business is operating profitably;
Can sales cover expenses?
13. Cash-flows
Easiest!
• Just look at opening cash and closing cash
• Change in cash to see delta/different
• Do they have enough cash on hand (judgment call!)
14. Ratios
• Useful because they help us
understand individual items from
the financial statements by
putting them in context of related
items
Simplest Ratios:
• Establish relationships between • Quick Ratio (acid test ratio)
data from various places in order • Current Ratio
to make judgments • Return on assets
• Can be used to predict and/or • Revenue per employee
establish solvency, liquidity,
profitability
15. Horizontal analysis is “trend” analysis
Applied to financial statement items
(revenue, assets, liabilities, etc.) and
ratios (current, return on assets, etc.)
Look at year to year changes for the same
item
Example: What is the three year trend in
sales?
Vertical analysis is also called
Analysis Tools ‘benchmarking’
Also applied to financial statement items
• Horizontal or ratios
• Vertical Compare your company’s financial
statements or ratios to industry averages
