Finance for Non-Financial Managers: An Introduction to the Financial Statements

Dave JoneseLearning, Finance for Non-Financial Managers0 Comments

financial statements

financial statements

A short guide to the Financial Statements for Non-Financial Managers…

The separation of ownership and control for modern businesses means that managers need to make detailed reports to the owners – in the form of Financial Statements.
Income StatementThe question of how well (or badly) a business is doing is answered in the form of the Profit and Loss Account (P&L). The P&L compares a business’ costs and expenses to its sales and works out the difference (e.g. the profits). Also known as the Income Statement, this is a key measure of success (or failure).

BalanceSheetWhat have managers bought during the period in question? And what obligations have they incurred (aside from the investment funds provided by the owners)? The Balance Sheet provides the answers to these questions. It records: Assets that have been bought; Liabilities that have been incurred; The level of shareholders’ investment funds that have been provided to the business.

cash flow

The Cash Flow Statement is used to record the impact of managers on the changes in a business’ cash holdings over the accounting period, in terms of receipts and payments. The Cash Flow Statement details this by analysing changes in key items on the Balance Sheet, and the extent to which cash flow has been generated from profits.

accounting standardsFinancial accountants’ are guided in their efforts to provide consistent financial information to the owners of a business by what are called ‘accounting standards’. These standards vary in different countries. Auditors (another kind of accountant) then check the resulting Financial Statements against these same standards.

Management accountants work with the same data that is used by financial accountants – but their reports are used for internal purposes. ‘Management accounting’ produces very detailed information that the managers of the business use to help them make future decisions (e.g. investment choices) – and thus contributes to the overall results of the business over time.

Four Accounts
Every transaction a business makes is classified according to its nature, and recorded via the creation of two corresponding entries in one or two of these four types of account: Income; Expenses; Assets; Liabilities.

The Income Accounts of a business are used to record all of the income that it has earned, from a variety of sources. These include: Interest payments received (or due); Sales of services or products.

A business’ Expense Accounts record costs of all types, such as: General expenses required to run a business and sell its products and services; Specific costs of making, buying or preparing products and/or services that are then sold; Interest that has been charged on any funds it has borrowed.

The Asset Accounts of a company record all of the assets that are either currently owned by that business, or which are owed to it. There are two key types of asset – Fixed Assets and Current Assets.

The Liability Accounts of a business will record two things: Any ‘monies’ for which the company is liable (based on past transactions); Where the funds have come from that are being used in the business.

LiabilitiesLiability accounts break down into three main types: Equity (e.g. the funds provided by the owners of the business); Loans (e.g. all of the funds that the business has borrowed in the past); Creditors (e.g. the money that the company owes for the things that it has bought).

 

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