Financial Statement Analysis

Financial Statement Analysis, Learn how to make understanding financial statements your superpower!

The employees want a raise! You need to commit to a supplier! A customer wants assurance! You need to raise funds quickly!

No matter what situation you are in as a manager, in or in business, the financial statements provide the information you need. Sure, you can ask an accountant to read the financial statements. But that accountant may not be an expert in your field. Here’s the reality, you don’t need an accountant to do your job. But you do need financial statement information to make many decisions. The good news is that you can understand financial statements on your own and apply that information in your field better than an accountant unfamiliar with the business.

I’m Dr. Eric Knight, I am a CPA with over 20 years’ experience in business and academics. I’ve designed this course to explain financials in a thorough but straightforward manner without the complexities. You’ll be introduced to the financial statement information. Then, you learn how to analyze financial statements. I’m not just going to provide formulas but I’ll explain why you need the ratios and how to apply them to a business. I’ll demonstrate using real-world company data to see the story of the business behind the financial information. We’ll see where managers could exploit flexibility so we don’t have any misunderstandings.

In addition to case studies and examples, you can test your knowledge with quizzes and discussion questions that offer an opportunity to apply the information to your field.

Whatever field you are in, make understanding financial statements your superpower!

Why we analyze financial statements

Financial statements may be made by accountants but they are not for accountants. So, who uses the financial statements? Why do they use the financials? In our lesson we will delve into these topics to understand why financial statement analysis is so important.

GAAP – The Rules

If we want to understand the financial statements, we need to understand the rules used to create the financials. In this lesson we’ll learn about the rules, called GAAP. Where do these rules come from? Who is in charge of making GAAP rules? Then we’ll consider the relationship managers have with the financial statements and incentives management has in reporting.

Timing is everything

Measuring revenue is important. Profitability is a key element the managers are held accountable for by the owners of the business. But there are different ways to determine profit. What! Profit is not absolute?! Not at all. So understanding how the profit is determined will benefit anyone that needs to gain information from the financial statements.

Earnings Management

Optimally, the financial statements should reveal the true nature of the business. But there is an incentive for managers to produce income statements that make the business look great. Because GAAP includes flexibility in it’s application, managers can influence the reports. This is what is meant by Earnings Management. Let’s delve into this issue with our next lesson.

Balance Sheet Part 1

Let’s take a closer look at the financial statements. In this lesson we’ll begin with an overview of the two key statements used in business. The balance sheet and income statement. As important as knowing what is included on the statements, is understanding how the value of each element was derived. This lesson begins with a closer look at current assets.

Balance Sheet Part 2

We continue to unravel the mysteries of the balance sheet in our lesson. One of the most misunderstood accounting concepts is depreciation. We’ll discuss how property and equipment is valued first. Then we discuss what depreciation really is and what it is not. By the end of the lesson, we’ll understand book value.

Balance Sheet Part 3

Our journey through the balance sheet continues with intangibles and onward to the liabilities. Who knew the balance sheet could provide so much information on a business? The lesson ends with an overview of corporate bonds.

Statement of Cash Flows

We finally finish up with the balance sheet and move on to the Statement of Cash Flows. Cash is the most important current asset a business has. Without cash the business cannot pay employees or vendors. So how that cash is derived gives the financial statement analyst important information. This lesson takes us through the Statement of Cash Flows while explaining the implications of cash to the organization.

Time Series

The objective of the financial statements are to provide external users with a window into the company. But do we understand what we see in that window? Let’s begin understanding the financial statements by using time series analysis. This lesson starts explaining how to analyze a business using the financial statements.

Ratios

Ratios provide analysts with tools to develop deeper understanding of the financial statements. Ratios can help us to determine risk and get a feel for management’s performance. In this lesson we learn ratios that can evaluate profitability, liquidity and solvency of an organization.

Applying Ratios

In a previous lessee we began our journey towards understanding ratios. In this lesson we take the next step. We use those ratios on real companies that actually exist. We’ll analyze real numbers from Lowe’s, Home Depot, Pepsi, Coca Cola, and Monster to see how using ratios can tell us a story about the operations of management.

Valuation

What is a business worth? Is it the buildings and equipment the company has? Is it the value of the employees? Is it the earnings power? Determining value is not as easy as one might thing. In this lesson we’ll dive into this idea of valuation.

Credit

A common option used in business is to obtain funds to buy the necessary resources by taking a loan. The creditor needs to understand the business to ascertain the risk of not being paid back. This lesson examines the various methods that creditors approach determining a risk. We begin with an overview of the various types of loans used in business in general.

Contracts

Contracts are used extensively in management. Human resources or supply chain managers for example. HR may need to make a decision on giving employees raises? Supply chain managers need to determine if their supplier is in good financial shape? So, the financial statements are often a big part of the contracting function of business. In this lesson we will consider how financial statements can shape our business contracts.

Executive Compensation

Managers are people. People tend to look out for their best interest. But what about the company? How can we structure management compensation in a manner that leads to a win-win situation between management and the stockholders? Our lesson will consider the long- and short-term considerations used to develop management compensation.

Leases

Why discuss leases in a course on financial analysis? Well, it seems leases are a tool that management might use to influence the performance of the financials without increasing actual efficiency. Because we are learning to analyze and understand the financial statements, we need to be aware of the implications of using leases for that purpose.

Owners’ Equity

Another option a manager has to get funding for the business, is to sell stock. Stock is a share of a business. Stockholders are owners. There are multiple types of stock. Stocks may have features associated with the shares. Let’s learn more about the equity side of balance sheet!

Earnings Per Share

The Earnings Per Share ratio is used extensively by stock analysts. It is the only ratio included with the financial statements. However, earnings per share can be impacted by changes to the number of shares. In our lesson we see how that can occur and how we adjust the Earnings Per Share to include potential harmful impact of changes to the number of shares.