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