Join Jim Stice for an in-depth discussion in this video Overview of financial statements, part of Finance Foundations.
- Remember that finance is identifying necessary resources, figuring out how to get the money to buy those resources, and then managing those resources efficiently once you have them. Well to identify and determine and manage you need information. That's where the financial statements come in. So we need to talk about accounting for just a minute, it's okay, it's just for a few minutes. First, what is accounting? Accounting is quantitative information, it's numbers about money, so it's financial. Accounting is meant to be practical, it's useful, it's not theoretical, although accounting theory is great, accounting is designed to be useful to make decisions.
We use accounting information from the past to make decisions in the present to change the future. That's accounting. Here's what we are going to discuss as we discuss accounting here. First the financial statements, the balance sheet, the income statement, and the statement of cash flows. Raw material to be used in making finance decisions. We'll look at some basic financial ratios, which are really nothing more than taking one accounting number and dividing it by another and we'll be amazed at how much information we can get when we do that. And finally we'll do some simple practice in financial statement forecasting using this year's financial statements to help us forecast the impact of decisions that we're making on next year.
It will be a powerful use of financial statements. So the financial statements, there are three of them, the balance sheet, the income statement, and the statement of cash flows. Briefly, the balance sheet is a report as of a point in time. What stuff do you have? Accountants call them assets. And what obligations do you have? Accountants call those liabilities. As of a point of time, today, the end of the year, a balance sheet, a listing of your assets and liabilities. An income statement. For a period of time, for a month, or a quarter, or a year, how much money did you make? That's an income statement.
And finally a statement of cash flows. For a period of time, a month, a quarter, or a year, where did your cash come from and how did you spend it? Those are the three financial statements, the balance sheet, the income statement, and the statement of cash flows.
- Understanding financial statements
- Managing finances in the short term
- Analyzing risk and return
- Obtaining short-term and long-term financing
- Understanding the stock and bond markets
- Comparing the Facebook and Microsoft IPOs
- Working with financial institutions
- Using capital budgeting
- Creating simple personal saving and investment plans