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Financial Statements for Beginners

Name: Financial Statements for Beginners
Rating: 4.6 (87 reviews)

Understanding the Profit & Loss Statement, the Balance Sheet, and the Cash Flow Statement

Created byDaniel Keating

Last updated 8/2024

English

What you'll learn

The key concepts behind the 3 financial statements
Profit and Loss Statement
Balance Sheet
Cash Flow Statement
Understand how transactions in a business impact each of the financial statements
How the financial statements interact with each other
The difference between GAAP & IFRS accounting
Creation of all 3 financial statements

Course content

6 sections • 17 lectures • 1h 53m total length

Introduction to Accounting and Finance3:28
The author nearly lost a year's profit while working in Asia Pacific due to misunderstanding how to attribute a huge investment.
I enrolled in an MBA to learn from my mistakes and build a sound understanding of Finance and Accounts.
I now offer a course on building and transacting in a fake restaurant business.
The course covers 10 years of financial reports covering everything from setting up a company to making acquisitions.
It teaches the difference between Profit and Loss account, balance sheet, and cash flow statement and how they interact with each other.
Financial Reporting: An Introduction5:39
This course discusses how to value a company by understanding how to read financial statements.
A company is simply a collection of tangible and intangible assets and liabilities, and all businesses require assets to create revenue.
Financial reporting is made up of three main statements: the profit and loss account, and balance sheet, and cash flow statement.
The profit and loss account shows the overall measure of financial performance for the year, culminating in the net profit figure.
The balance sheet lists all assets owned by the business and the value of those assets, and on the other side, all the claims that are on the business.
Investors also need to use ancillary information to build a complete picture of the company and its economic performance.
This course focuses on all three statements, with a focus on the P&L being particularly susceptible to being window-dressing to paint a more positive picture.
Equity is the sum of all the asset values and liabilities of a business, and it must equal the total value of all claims.
It is important to understand the importance of equity in a company and the rules and regulations that apply to it.
Profit & Loss Statement3:04
The profit and loss account (P&L) has three main sections: revenue, expenses, and profit.
Revenue is the sales made from a product or service.
Cost of goods sold includes direct materials, labor, and overheads. SG&A includes advertising, legal and insurance expenses, office supplies, and utility expenses.
Other comprehensive income includes gains or losses with things like hedging or currency movements.
The P&L is like an annual performance statement for a business.
Balance Sheet7:31
The balance sheet is a statement of a company's financial position at a single point in time, separated between assets, liabilities, and shareholder's equity.
Current assets include cash, accounts receivables, inventory, and prepaid expenses. Non-current assets include long-term assets like property, buildings, equipment, and goodwill.
Current liabilities include accounts payable and bank loans, while non-current liabilities include commitments and contingencies.
Deferred revenue is recognized as an asset on the balance sheet, even if revenue is not recognized on profit and loss statements.
It's important to pay attention to these details as they may indicate future liabilities that the company may face.
The balance sheet also includes information on preferred shares, which can be split down to common shares or preferred shares.
Cash Flow Statement3:52
The cash flow statement shows where cash is being generated in a business and is split into three main sections: operating, investing, and financing.
There are two methods to calculate it: direct and indirect.
Operating cash flow is the portion of the financial statements that will keep a business alive or kill it. If a business fails to generate positive cash flow from operations over the medium to long term, it will run out of cash.
Working capital is a metric for the company's liquidity, and a trend down in working capital may indicate financial stress.
Lack of Property Plant and Equipment Investment may indicate whether the company is in decline.
Financing requirement or surplus will give an indication of whether the business is able to generate enough returns to cover the investment in assets.
Cash flow statement is a great place to spot issues that may exist in the business.
Financial Statement Notes3:57
Financial statements provide financial and non-financial information, but not everything is clear at first glance.
Pay attention to accounting standards, depreciation methods, revenue recognition, inventory valuation, and tax rates.
Indirect information such as commitments, contingencies, and employee stock-based compensation plans are also important.
The accompanying notes provide a breakdown of financial instruments, debt, interest rates, inventory, and slow-moving inventory.
The statements also include messages from the chairman, company profile, risks, and strategic direction information.
Direct information includes a business description, management notes, reporting controls and policy, financial statements, accompanying notes, earnings per share, and board listings.

Year One Transactions14:42
This lesson discusses the importance of understanding financial accounts when investing in companies.
It provides an example of a vegan restaurant and the transactions that need to take place to get up and running.
The first transactions we look at will involve swapping the current asset (cash) for a non-current asset (equipment).
The equipment needs to be depreciated over a period of time, and the life cycle of the equipment we will use in our examples, is 10 years.
We will look into transactions involving short-term bank loans, (which is recorded as a liability on the balance sheet), and then transactions involving buying equipment to cook and serve food.
We show you all the transactions to build and run a restaurant business.
Year One Balance Sheet4:14
The balance sheet of a company includes cash, current assets, non-current assets, current liabilities, long term liabilities, and equity.
All transactions need to be taken into account.
Our example company bought land, buildings, and equipment; and the cost, accumulated depreciation, and Net Book Value of these assets are all accounted for in the balance sheet.
The balance sheet also includes the claims on the business, including paid-in capital and retained earnings of the shareholders. Plus, the claims from external institutions for loans and overdrafts.
Overall, the balance sheet provides a snapshot of the company's financial health.
Year One Profit & Loss Statement4:37
The lesson explains how to account for the 44500 USD of retained earnings in the profit and loss account of a company's balance sheet.
The account is structured by looking at transactions related to revenue and expenses for the financial year to determine net profit.
The sales revenue is at the top of the list of transactions, and the gross profit is calculated by subtracting COGS from the revenue.
Operating expenses, salaries, SG&A, and depreciation are also included in the account.
The depreciation charges are related to the straight-line method of depreciating assets.
By subtracting these expenses, the company ends up with Profit before interest and Tax, which equals 57000 USD.
The article also mentions the importance of keeping an asset register related to capital expenditures.
Year One Cash Flow Statement5:45
This lesson discusses the importance of generating positive cash flow from operations for a business's financial success.
The cash flow statement looks at the company's cash position and shows the capability to generate positive cash flows.
It is widely viewed as the main benchmark assessing the quality of earnings reported in the profit and loss statement.
The text calculates the profit before interest and tax by subtracting depreciation and the change in stock for the year.
It then adds back depreciation to calculate the cash flow out of the business.
The ability of a business to generate cash is what investors and analysts are interested in, and cash flow is regarded as one of the most important financial performance indicators alongside profitability.
By paying close attention to cash flow, one can save themselves from investing in a shocker.

Year Two Transactions12:45
The text discusses the importance of understanding the key concepts and transactions that impact a business's balance sheet and profit and loss statement.
In year two, the author discusses the need to carry over numbers from year 1 and add transactions to the assets and claims on the business.
The first transaction involves buying land, buildings, and equipment to expand the business by opening up two new restaurants.
The second transaction involves taking out a further $250,000 loan to invest in the business and reducing the cash on the asset side of the balance sheet by $160,000.
The transactions are listed one by one, and readers are encouraged to pause the video to think about the entries in the transaction list.
The goal is to build wealth and not be accountants.
The lesson provides examples of the author's previous businesses and encourages readers to ask questions if required.
Year Two Profit & Loss Statement1:41
This lesson discusses the financial performance of Power of Plants.
The company produced revenue of $2.25 million with a gross profit of $1.2 million in year 2.
Gross profit is the sales revenue minus the COGS.
Operational expenses include salaries, SG&A, selling general and administration expenses, insurance costs, utility expenses, and marketing expenses.
Depreciation of 38,000 USD is subtracted.
The profit before interest is $408,000, and the net profit is $383,000 for the year.
We take you through step by step!
Year Two Balance Sheet7:30
The balance sheet shows a business's assets and claims.
Cash position increased from $414,500 to $527,500 due to new loan, sales, and capex investment.
COGS and operational expenses impacted cash position.
Non-current assets reflect stock and cash added together.
Equipment spent $260,000 on equipment at cost over two years, accumulating depreciation of $36,000, giving a netbook value of $224,000 after year 2.
Straight-line depreciation method depreciates assets by 10% each year.
This lesson provides a mini asset register to track assets purchased and net book value.
Year Two Cash Flow Statement2:50
The company's cash increased by 113,000 USD in year 2, resulting in a cash position of 527,500 USD.
The Profit before interest and tax (P&L) showed a profit of 408,000, with 38,000 of depreciation expense and 75,000 increase in stock value.
Accrued expenses increased by 27,000 and cash flow from operations was 398,000.
Investment cash flow was 510,000 due to buying land, buildings, and equipment paid for in cash.
Financing cash flow included 25,000 interest expense and 250,000 loan from the bank.
The change in cash from operations, investment cash flow, and financing cash flow is combined.
All statements are synchronized perfectly.
Cash outflow is a cash outflow, and the company did a good job converting the profit to positive cash flow.

Year Three Transactions21:10
The article discusses how businesses acquire businesses and incorporate their assets and liabilities into their balance sheets.
It highlights the impact of intangible assets acquired from other businesses, such as staff and equipment.
Intangible assets carry some value but are difficult to accommodate in accounting terms.
Non-tangible assets are included in the balance sheet under an entry called goodwill, which is reduced over time by amortization.
The lesson also discusses how a new investor puts forward $3,500,000 to acquire a business, which equates to more paid in equity into the business.
The acquisition includes six restaurant buildings, six pieces of land, equipment, stock, and an overdraft of $28,000.
Amortization operates in a similar way to depreciation of a physical asset, making it important to understand the original cost of acquiring a business.
Year Three Cash Flow Statement7:53
The article discusses how cash flow statements are calculated for businesses.
It uses the indirect method to calculate back the cash flows to the business from the operating profit.
The first step is to add back the depreciation, which is not a cash flow.
The article then allows for an increase or decrease in debtors and stock in relation to cash flow from operations.
The creditors are the firms that the business owes money to and represent the debt that needs to be settled into the future.
Any increase in creditors has the opposite effect of debtors on the cash.
Similarly, any decrease in stock from year to year will be seen favorably.
Finally, the lesson provides an example of how to calculate the cash flow statement for a business.

Financial Statements Conclusions2:34
The article discusses the basic rules of financial statements, their necessity, accounting techniques, and how they differ from each other.
It covers basic transactions that a company needs to take to form a company, capitalization, noncurrent assets, revenue, cost of goods sold, and operational expenses.
The article also discusses the difference between tangible and intangible assets, complexity related to acquisitions, the entry of goodwill into the balance sheet, and the impact of dividends on equity capital.
It also covers the importance of the cash flow statement and its interaction with other financial statements.
Overall, the article provides a basic run-down of key concepts to help readers interpret financial statements for any business.
Footnotes in financial statements are important to guide readers.

Requirements

No previous experience is required
Basic understanding of Excel
High School Mathematics understanding

Description

Are you looking to get a better understanding of financial accounts? Take our course and learn the ins and outs of the profit and loss statement, the balance sheet, and the cash flow statement.

From explanation of accounting concepts to preparation of the financial statements, this course is very much about learning by doing, as you embark on preparing the 3 financial statements for a fictional business!

Get ahead of the game with our fantastic financial statement course today!

This course is the ideal option for those that are looking to get some explanation of the structure of the profit and loss statement, the balance sheet, and the cash flow statement. We will also deal with how these financial statements are linked together.

The course is perfect for all those outside the finance profession but looked to get some insights into how to understand and prepare the financial statements.

· Understand how specific types of financial transactions will affect the company’s financial statements. This includes everything from capitalizing the company, taking loans from banks, buying equipment and stock, making sales, and paying staff salaries. We will even investigate how to account for cash injections, making acquisitions, and making dividend payments.

· During this course, you will become familiar with how to prepare basic financial statements.

· You will also learn what each specific line means in each of the financial statements, so you won’t be baffled with terminology going forward.

Techniques and Methodologies taught:

· Difference in accounting standards. GAAP vs IFRS

· Reading, interpretation and preparation of the Profit and Loss account (Income Statement), which will provide information around the financial performance during a period of time.

· Reading, interpretation and preparation of the Balance Sheet, which provides us with an ‘imperfect’ measure of the net worth of the business

· Reading, interpretation and preparation of the Cash Flow Statement, which tells us about the quality of the profit, as well as providing us with useful information about investment and financing for the business.

This course is like no other. Sometimes we learn be being told, sometimes we learn by being shown, and other times we learn by doing.

In this course you will learn in all three ways, with several assignments and quizzes, where you be able to prepare the financial statements yourself.

Most importantly, we will pretend to set up a new company from inception, and capitalize it, lend to it, transact in it, and see how all these transactions impact the P&L, Balance Sheet, and Cash Flow Statement. There is no better way to learn it!

The contents to this course can be applied to retail, manufacturing, distributions and a lot more.

Modules Included:

Module 1 - Overview

· Introduction

· The difference Between GAAP and IFRS accounting

· Introduction to accounting and finance

· Financial Reporting: An Introduction

· Profit & Loss Statement

· Balance Sheet

· Cash Flow Statement

· Financial Statement Notes

Module 2 – Year One Financial Statements

· Year One Transactions

· Year One Balance Sheet

· Year One Profit and Loss Statement

· Year One cash Flow Statement

Module 3 – Year Two Financial Statements

· Year Two Transactions

· Year Two Profit and Loss Statement

· Year Two Balance Sheet

· Year Two Cash Flow Statement

Module 4 – Year three Financial Statements

· Year Three Transactions

· Year Three Cash Flow Statement

Module 5 – Year 4 to 10 Financial Statements

· Year Four to Ten

· Year Four Transactions

· Year Four Assignment

· Year Four Quiz

· Year Four Answers

· Year Five Transactions

· Year Five Assignment

· Year Five Quiz

· Year Five Answers

· Year Six Transactions

· Year Six Assignment

· Year Six Quiz

· Year Six Answers

· Year Seven Transactions

· Year Seven Assignment

· Year Seven Quiz

· Year Seven Answers

· Year Eight Transactions

· Year Eight Assignment

· Year Eight Quiz

· Year Eight Answers

· Year Nine Transactions

· Year Nine Assignment

· Year Nine Quiz

· Year Nine Answers

· Year Ten Transactions

· Year Ten Assignment

· Year Ten Quiz

· Year Ten Answers

· Year Ten Cash Flow Statement

Module 6 – Conclusions

· Financial Statement Conclusions

Multiple downloadable Assignments and Quizzes to help with the calculations.

Everything you could possibly need in relation to understanding the financial accounts.

Enjoy!

Who this course is for:

Beginners looking to get a better understanding of the key financial statements
Non-financial folk interested in the financial statements
Investors looking to get a better understanding of any business
Small Business Owners
Consultants, Analysts, Advisors

Financial Statements for Beginners

What you'll learn

Explore related topics

Course content

Introduction6 lectures • 28min

Year One Financial Statements4 lectures • 29min

Year Two Financial Statements4 lectures • 25min

Year Three Financial Statements2 lectures • 29min

Year 4 to 10 Financial Statements0

Conclusions1 lecture • 3min

Requirements

Description

Who this course is for: