Financial Statements Lecture by Aiden from Bench Accounting

Overview

• Purpose: Understanding financial statements, their types, and how they aid in business decision-making.

Definition of Financial Statements

• Reports summarizing important financial info about a business.
• Three main types:
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement

Balance Sheet

• Purpose: Snapshot of business finances at a specific time, showing assets and liabilities.
• Categories:
  • Assets: Valuable items owned by the business (cash, furniture, inventory, etc.). Divided into:
    • Current Assets: Cash or equivalents, easily sellable.
    • Fixed Assets.
  • Liabilities: Debts owed (credit card debt, mortgages, etc.). Divided into:
    • Current Liabilities: Due within 12 months.
    • Long-term Liabilities: Due beyond 12 months.
  • Equity: Remaining value after subtracting liabilities from assets, includes common stocks and retained earnings.
• Equation: Assets = Liabilities + Equity.

Importance of a Balance Sheet

• Frequency of preparation varies by business size.
  • Large businesses: Daily.
  • Small businesses: Every three months.
• Analysis:
  • Liquidity: Measured with current ratio (Current Assets / Current Liabilities).

Income Statement

• Purpose: Shows money spent and earned over a period to calculate net profit.
• Sections:
  • Revenue
  • Cost of Revenue: Costs to make and distribute products/services.
  • Gross Profit: Revenue minus cost of revenue.
  • Operating Expenses: Costs of running a business (rent, utilities, etc.).
  • Operating Income/Loss: Gross profit minus operating expenses.
  • Taxes and Non-operating Expenses
  • Net Income: Bottom line profit after all expenses and taxes.
• Importance:
  • Indicates business profitability.
  • Helps identify overspending on production or overhead.

Cash Flow Statement

• Purpose: Shows cash flow in and out over a period, reflecting cash reality.
• Relevance: Important for businesses using accrual accounting.
• Sections:
  • Cash from Operating Activities
  • Adjustments (non-cash transactions like accounts payable)
  • Cash Flow from Investments
  • Cash from Financing Activities
• Analysis:
  • Ending cash check against bank account.

Conclusion

• Recommendation: Use templates to create statements or hire a bookkeeper, like Bench, for regular financial updates and smart decision-making.
• Encouragement: Continual financial oversight is key to entrepreneurial success.