Understanding financial statements

@Evenanerd on Twitterwww.evenanerd.com Copyright © 2013 Geni Whitehouse
Understanding
Financial Statements
By Geni Whitehouse, CPA
Countess of Communication

Imagine your business is a tree.

A fruit-bearing tree.

A fruit-bearing tree.
Like an apple tree.

This is your business.

The income statement measures the fruits of
your business efforts.

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

...that gets reset every year.

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

Profit =
Revenue – Expenses
Above the line

Department Focus
Profit =
Above the line

Department Focus
Bottom Line
Profit =
Above the line

At the end of each year,

net earnings (or Net Income) is
added to

net earnings (or Net Income) is
added to
Retained Earnings on the
Balance Sheet.

The Balance Sheet is a picture in time.

It measures the cumulative result of your business
efforts.

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

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

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.

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

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.
Assets – Liabilities = Equity

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.

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

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

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

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

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

Equity =
Assets – Liabilities

What
you
Own
Equity =

What
you
Own
What
you
Owe
Equity =

What
you
Own
What
you
Owe
Accumulated Earnings
Equity =

Without water, no tree can survive for long.
No business can survive without cash.

The Cash Flow Statement
shows
where the water went
in your business.

How much cash
was consumed
by the Income
Statement?
Income
Statement

How much cash
was consumed
by the Income
Statement?
Income
Statement
Balance
Sheet
How much cash
was consumed
in growing
the Balance Sheet?

connects
the Income Statement
to
the Balance Sheet.

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?”

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

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

Income
Statement

Income
Statement
Balance
Sheet

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

Concepts by Geni Whitehouse
Even a Nerd Can Be Heard
Artwork (if you can call it that) also by Geni Whitehouse.
www.evenanerd.com
The End

Understanding financial statements

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