understanding Financial Statement with example

1. Understanding
Financial Statements

2. Imagine your business is a tree.
Imagine your business is a tree.
A fruit-bearing tree.
Like an apple tree.

3. This is your business.

5. The income statement measures the fruits
of your business efforts.

6. Like a tree, your business produces an
annual yield...

7. ...that gets reset every year.

8. The Income Statement
starts at zero at the beginning of every
year
and measures the annual yield.

9. Profit =
Revenue – Expenses
Above the line

10. Profit =
Revenue – Expenses
Department Focus
Above the line

11. Profit =
Revenue – Expenses
Department Focus
Bottom Line
Above the line

12. At the end of each year,
At the end of each
year,

13. At the end of each year,
At the end of each year,
net earnings (or Net
Income) is added to

14. At the end of each year,
net earnings (or Net
Income) is added to
Retained Earnings on the
Balance Sheet.

15. At the end of each year,
net earnings (or Net
Income) is added to
Retained Earnings on the
Balance Sheet.
net earnings (or Net
Income) is added to
Retained Earnings on the
Balance Sheet.

16. At the end of each year,

17. The Balance Sheet is a picture in time.
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It measures the cumulative result of your business
efforts.

18. It measures the
cumulative result of your
business efforts.
It sustains your business
over the long haul.

19. A tree can not bear fruit
without the support of a strong trunk.

20. 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.

21. The Balance Sheet measures what you
own and what you owe.

22. 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.
The equity section is the difference between
the two.

23. Assets – Liabilities = Equity

24. The equity section is the difference between
the two.
Assets – Liabilities = Equity
Equity is sometimes called Net Worth.
Equity approximates
the net value of your
business.

25. If you slice open the trunk of a
tree, you can read the story of
each year in its life.

26. You will find lean years...
...with little or no Net Income.

27. And strong years...
...with plentiful Net Income.

28. Those rings are like the equity
section of the Balance Sheet.

29. Those rings are like the equity
section of the Balance Sheet.
Accumulated Retained Earnings
=
Equity

30. Equity =
Assets – Liabilities

31. Equity =
Assets – Liabilities
What
you
Own

32. Equity =
Assets – Liabilities
What
you
Own
What
you
Owe

33. Equity =
Assets – Liabilities
What
you
Own
What
you
Owe
Accumulated Earnings

34. Without water, no tree can survive for long.
No business can survive without cash.
The Cash Flow Statement
shows

35. where the water went in your business.

38. The Cash Flow Statement
connects the Income
Statement
to the Balance
Sheet.

39. 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?”

42. ...keeps the business
running
Operating cash
flow ...

43. ...keeps the business
running
Operating cash
flow ...

44. Net Increase (Decrease) (3,700)
... To cash in the
bank.
From Net
Income ...

45. Income
Statement

46. Income
Statement
Balance
Sheet

47. Income
Statement
Balance
Sheet
Statement of
Cash Flows
Success in
business
requires a
focus on all
three
financial
statements.

48. The End