How to Read Financial Statements: Build Financial Literacy.

Read financial statements and speak the language of business without the drudgery of a traditional accounting course

Created by: David Johnson
Retired Professor at Northcentral University

What Will I Learn?

• Explain how the balance sheet, income statement, and statement of cash flows are used, what they measure, and why we need three statements.
• Differentiate between income and cash flow
• Explain what is the balance sheet equation and why the balance sheet equation is the foundational model for accrual accounting/double entry accounting
• Define what are assets, liabilities, and equity and how assets, liabilities, and equity relate
• Explain how the statement of cash flows and income statement link into the balance sheet
• Explain how accounts work like buckets
• Locate a real company’s annual report at their website and locate their financial statements within the annual report
• Explain who are the six most important stakeholders of a corporation (employees, customers, government, vendors, lenders, investors)
• Explain the give and take of a transaction and how to record both sides of the transaction separately with the six stakeholders
• Explain which side of the give and take appears on the income statement and on the statement of cash flows
• Explain why you can’t measure profit with cash and why you need to use accrual accounting (double-entry accounting), not cash accounting
• Illustrate how accrual accounting can both record cash and profits using a spreadsheet
• Explain the basis for bookkeeping and basic accounting without learning bookkeeping
• Explain what each line item of the balance sheet means and distinguish between current and noncurrent assets, liabilities, and shareholders’ equity
• Explain what each line item of the income statement means, including revenues, expenses, and earnings per share
• Explain each important line item for the three sections of the statement of cash flows: operating activities, investing activities, and financing activities
• Explain how the format of the operating activities section differs from the other two activities (investing and financing)
• Test your knowledge by completing 28 multiple-choice questions about the 2013 Facebook annual report
• Explain four areas that can go wrong in a business (sales pricing, expense control, asset management, and asset financing)
• Explain how four ratios (return on equity, profit margin, asset turnover, and financial leverage) can detect problems within the four potential problem areas
• Compute return on equity, profit margin, asset turnover, and financial leverage ratios from real company’s financial statements
• For the return on equity ratio, drill down into its three component ratios (profit margin, asset turnover, and financial leverage) to pinpoint problem areas
• Start with the profit margin ratio and drill down to compute the gross profit percentage and expense percentage from a real company’s financial statements
• Locate management’s explanation for year-to-year changes in ratios from the company’s annual report
• Summarize the key reasons for return on equity variations for a real company from year-to-year
• Explain how four industries (distribution, manufacturing, service, and financial services differ in the way they make money
• Explain how the profit margin, asset turnover, and financial leverage ratios can reveal the key differences in the way that four industries make money

Requirements

• There are no prerequisites for the course. You do not need to know anything about accounting or finance

Target audience

• Business students who want a big picture view of accounting by understanding the end product, financial statements, not how the end product is created through bookkeeping
• Managers who want to read and understand financial statements without learning bookkeeping
• Investors who want to read and understand annual reports and 10Ks
• Non-accounting/finance employees in companies who want to determine how their company is doing without taking an accounting course
• Accounting/finance majors should not take the course