It is time to analyze and interpret Financial Statements

Ejiroghene Ekpogbe Written by Ejiroghene Ekpogbe · 2 min read >

A thumb rule I have learned from life’s experiences is that application is a genuine test of knowledge. You could only tell that you know or have learnt something if you could practice it successfully. The Corporate Financial Accounting course certainly requires practical tests, otherwise, it may not achieve its objectives for the MBA program. For example, one of the course’s objectives is to “help develop in participants, financial accounting literacy skills and thus, able to help participants to better understand the financial information companies release for the benefit of outsiders (investors), typically shareholders and other users.” I didn’t understand the intensity of this aim until the faculty gave us an assignment. When I completed my assignment, I had to assess myself to know if the course was as effective to me as one of its objectives stated, and if I was moving in tandem with the course offerings.

What do you think resulted from my self-assessment? It was positive! And I was happy to realize I was making good progress in the Corporate Financial Accounting course. The class assignment was practical. First, the faculty asked us to mention and explain some key terms we had learned in class. The second task was to download a company’s annual report, identify and familiarize ourselves with the financial statements in the report, and derive the monetary figures for the key accounts in each of the financial statements.

This assignment was indeed a genuine test of my knowledge. What key terms I have learnt so far? Interestingly, I have got a few in my vocabulary of financial accounting terms such as balance sheet, revenue, cash flow, assets, liability, owner’s equity, accounting equation, and so on. At this rate, if I keep up the zeal and efforts, I am sure that by the end of the Corporate Financial Accounting course, I would have become “a native speaker of the financial accounting language.”

The second part of the assignment was more complex and required more work. In fact, I realized I was put in a real-life situation where I was presented with a real company’s annual report, and I needed to make sense of its contents. Identifying the financial statements and their notes was no big deal but identifying the key accounts in the statements was quite a mundane task! It was difficult and quite confusing to determine the components of a key account in the statements. But knowing that I cannot run away from this task, I had to commit more attention to it, studying it closely by understanding and trying to interpret what the entries in each of the financial statements meant.

Every financial statement has some key accounts, which are also regarded as the structure of the financial statement. The task was to identify the key accounts and their figures from the current and prior years (2020 and 2019). Using the statement of financial position to illustrate this, the three major key accounts are the Owner’s Equity, Liability, and the Assets. I have learned that a company’s total asset is the total of its owners’ equity and the liability, but as I analyzed the company’s balance sheet, I noticed there were several entries that made up the owner’s equity account, as well as the liability account. My initial difficulty was in determining if a particular entry was part of the equity or a liability. After several trials and the computation of their figures, I finally arrived at the answer. You know that you have arrived at the right answer if the sum of the equity and liability equals the total assets. That is,

Assets = Owner’s Equity + Liability.

Although I faced a lot of difficulty on solving my assignment, I was happy with the results achieved.

This is just the beginning, there are a lot more to achieve!

Indeed, application is a true test of knowledge. You can only tell you have learned something new when you are able to put it into practice and do it successfully.


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