Essentially, all establishments, regardless of their size, corporate objective, or line of business, have a unique and important story to be communicated to a wide range of audiences. This is usually achieved through a chief communicator, who we know as an accountant.
Corporate Financial Accounting (CFA) being one of the core courses of the Modular MBA programme, is not designed to merely produce accountants, rather, it seeks to mould MBA students into world-class managers by equipping them with the relevant knowledge and skills required to effectively manage a business. These skills include the ability to read financial statements, analyze, and employ the appropriate analysis technique(s) to correctly interpret them and other operating data in order to make informed business decisions. Financial statements are useful to managers, investors, financial advisers, lenders, tax authorities, legal institutions, and even employees.
Financial statements provide information on the past performance, present, and future position of a company. There are four basic types and a note to the accounts.
Balance Sheet (Statement of Financial Position)
This report provides information on the assets, liabilities, and shareholder equity at a specific point in time. As the name suggests, it gives insight into the financial position of a company at any given time. The rule of thumb here is that for any organization, the Total Asset is a summation of the Total Liabilities and the owner’s equity (OE). The equation, A = L + OE, is known as the accounting equation or business equation.
Statement of Profit or Loss (Income Statement)
This is a summary of the revenues, costs, and expenses incurred over a given period. It shows how the revenues of the company translate to the net income or net profit.
Statement of Cash Flow
Also referred to as Cash Flows, this statement provides information on how variations in the balance sheet accounts and income impact both cash and cash equivalents.
Statement in Equity (Statement of Retained Earnings)
This shows the change in equity of the owner or shareholder throughout an accounting period.
Notes to the Accounts
These are reports and comments made on the information provided in the statement of financial position, profit and loss, and cash flows. They represent important accounting principles and facts relevant to the reader.
Analysis of Financial Statements
The five common types of financial statement analysis are Horizontal, Vertical, Common-size, Trend percentages, and Ratio.
This type of financial statement analysis is used to calculate the dollar or percentage changes of an item or an account in a financial statement, from one period to the next. The comparison is usually done between the current and prior (comparator) years.
This type of financial analysis is used to calculate the percentage of an item or account in relation to a significant total in the financial statement for a particular year.
Common-size Statement Analysis
This focuses on income statements and is only expressed as a percentage of revenue or sales, rather than the absolute dollar amounts. It is used to show how each line item or account affects a company’s financial position.
Trend Percentages Analysis
Illustrates the changes over time of a specific item or component in a financial statement and can be used to evaluate financial information over several years.
This type of analysis is a method used to find a logical relationship between items in a financial statement of a particular period to gain insights into a company’s financial health.