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accounting for-financebeginner30 min
Financial Statements Crash Course
A quick primer on reading income statements, balance sheets, and cash flow statements for finance classes.
What You'll Learn
- ✓Read and interpret each major financial statement
- ✓Understand how the three statements link together
- ✓Calculate key ratios from raw data
1. Income Statement Basics
Revenue minus expenses equals net income. Key subtotals: gross profit, EBIT, EBT, and net income.
Key Points
- •Revenue recognition follows accrual basis
- •EBIT strips out financing and tax effects
- •Depreciation is a non-cash expense
2. Balance Sheet Structure
Assets = Liabilities + Equity. Current assets and liabilities are due within one year.
Key Points
- •Assets listed by liquidity
- •Retained earnings links income statement to balance sheet
- •Book value rarely equals market value
3. Cash Flow Statement
Three sections: operating, investing, and financing. Starts with net income and adjusts for non-cash items.
Key Points
- •Add back depreciation to net income
- •CapEx appears in investing section
- •Debt issuance appears in financing section
4. How They Connect
Net income flows to retained earnings on the balance sheet. Cash from the cash flow statement matches the balance sheet cash.
Key Points
- •Change in cash = sum of all three sections
- •Depreciation appears on all three statements
- •Working capital changes bridge accrual to cash
Key Takeaways
- ★Assets = Liabilities + Equity always balances
- ★Positive net income does not mean positive cash flow
- ★Free cash flow is derived from all three statements
Practice Questions
1. A company reports net income of $100K and depreciation of $20K. What is cash from operations (simplified)?
$120K. Depreciation is added back because it is a non-cash expense.
2. If total assets are $500K and equity is $300K, what are total liabilities?
$200K. Assets - Equity = Liabilities.
FAQs
Common questions about this topic
Basic familiarity with the three statements is essential. This guide covers what you need.
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