Analyzing Financial Statements

Introduction to Finance & Accounting
Analyzing Financial Statements

Running a successful business is not an easy task to undertake. There is always the “good” idea to start a new business on. For instance “I am a great cook and I think I should open a restaurant”. This sounds like a swell idea and in fact friends and family would encourage you   to do so, they are there to at least give moral support. People get fired-up and plunge head first into business, not once thinking about the financial and accounting aspects of business. They do not even know that they need to know about finance and accounting. This is the demise of many businesses. They are usually under-funded (No working capital), or they are mismanaged and 80 percent of small businesses fail within the first year due to the above stated mistakes and other considerations ( Finance and accounting help to determine the survival of a business and should be among the basic business operations that should be learned by a new business owner.
There are three major components that form a financial statement and these are the income statement, the balance sheet and the statement of cash flows (Block, S and Hirt, G). Financial statements are directly derived from accounting and these help financial managers, investors, and bankers determine the direction a company is heading in (Block, S and Hirt, G).
Income Statement:
This is a device that measures a firm’s profitability over a time period whether it is a month, a few months, or even a year (Block, S and Hirt, G). This statement starts with the company’s sales and then accounts step-by-step expenses such as cost of goods sold, administrative costs, depreciation, interest paid, and taxes paid. This can lead to a profit or loss after all expenses have bee subtracted from total sales numbers (Block, S and Hirt, G). Income statements include calculations for return on capital, earnings per share, and price-earnings ratios....