This document discusses the importance of understanding financial statements for businesses. It outlines the three main categories of financial statements - the income statement, balance sheet, and cash flow projections. The income statement shows profits and losses over time, the balance sheet outlines assets and liabilities, and cash flow projections forecast incoming and outgoing cash flows. Financial statements are critical for both external stakeholders like banks and investors, as well as internal use by business owners to help manage and monitor the health of their company.

1. 1
Understanding Your Financial
Statements
Dennis L. Thompson, CPA, CFE
206-390-9432
www.dlthompsoncpa.com
Financial Statements-Compass
For Your Business
• Ultimate Goal of Accounting System
• Best Friend or Worst Enemy
• Tells You Where Your Company
– Has Been
– Where It Is Now
– Where It Is Going

2. 2
Categories of Financial
Statements
• Income Statement
– Where You Have Been
• Balance Sheet
– Where You Are Now
• Cash Flow Projection & Budgets
– Where You Are Going
Recommended Reading-
Jim Schell

3. 3
Profit & Loss
• Measures Business Activity Over a Period
of Time
• Income & Expense Accounts Are
Temporary & Closed to Retained Earnings
• Expenses Can Be Classified As Variable or
Fixed
• Most Useful If Compared to Different
Periods
Profit & Loss – One Year
Variable Expenses
Gross Margin

4. 4
Profit & Loss - Comparison
Profit & Loss – By Job

5. 5
Balance Sheet - Assets
Balance Sheet-Liabilities &Equity

6. 6
Balance Sheet - Comparison
Balance Sheet - Comparison

7. 7
Statement of Cash Flows
Increase
Increase
Increase
Decrease
Decrease
Sales By Customer Summary

8. 8
Accounts Rec – Aging Analysis
Purchase By Vendor Summary

9. 9
Accounts Pay – Aging Analysis
Budgets
• Why Budget
– Forces You to Think & Plan About Your
Business
– Sets Expectations for Employees
– Early Warning System
– Can Help Detect Fraud

10. 10
Budgets
Budget Vs Actual

11. 11
Never Run Out of Cash
Never Run Out of Cash-
Philip Campbell

12. 12
Sample Cash Flow Projection P1
Sample Cash Flow Projection P2

13. 13
Summary
• Financial Statements Reflect the Health of
Your Business
• Primary Audiences
– External – IRS, State, Banks, Investors
– Internal – You – To Help Manage
Business
• Most Problems Don’t Happen Overnight
• Financial Statements Serve as Early
Warning
Summary
• Financial Statements Must Be Analyzed
and Acted Upon
• It is Difficult to Be Successful in the Game
of Business if You Don’t Know How to Keep
Score