UNDERSTANDING CORPORATE FINANCIAL STATEMENTS BEYOND NUMBERS

A few weeks ago, I started a journey at the Lagos Business School that inspired me so much and opened my eyes to a better understanding of all the corporate financial statements and how to analyse them to make business decisions.

It all started with the famous question from Professor Owolabi. He asked, “how many types of financial system statements exist in a typical annual report of a company?” He will always say that the correct answer is “four plus one”, as listed below.

1. Statement of financial position.
2. Statement of Profit or Loss (known as Income Statement)
3. Cashflow Statement
4. Statement of changes in Owners equity.
5. Notes to the accounts.

In this post, I will share my learnings about the understanding of the statement of financial position beyond convention as gathered during my corporate finance analyses (CFA) classes at the best business school in Africa – Lagos Business School of the Pan-Atlantic University, Nigeria.

Let me start with the statement of financial position, popularly known as the balance sheet. I understood that this is used to see the status and condition of a company’s financial or business. In other words, a balance sheet can also be referred to as a statement of financial or business position and condition. During the engagement with these two professors, I understood the structure and elements of these financial statements, which an equation could define. Assets are equal to the sum of liabilities and owner’s equity.

(Assets (A) = Liabilities (L) + Owners Equity (OE)). 

The incredible part of learning and understanding the analyses of a balance sheet is how to categorize its items under assets, liabilities, and owner’s equity. I now understood that the categorization below will assist better in taking business decisions when combined with the conventional categorization we always see in a typical balance sheet.

This means beyond categorizing Assets as current on non-current, it is important to know if a company’s asset is income-generating or non-income generating. Likewise, the liabilities of a company must be analysed in terms of risk-fund / interest-bearing or non-risk-fund / non-interest-bearing whether current or long-term liabilities. Owners Equity on the other hand should be analysed based on the contributed and earned capital which can further be broken into shared capital, retained earnings, contributed surplus, and so on.

Analysing the components of the statement of financial position using these categories will assist in making a good business decision. A company would like to pay more attention to an income-generating asset than a non-income-generating asset. Liabilities that are risk-fund or interest-bearing liabilities will be on the radar of a company’s management more than that of a non-risk fund or non-interest bearing. This will allow the company to know when the status of any liability also changes. The same applies to understanding and analysing the Owners equity because a company will be able to see how the stakeholders’ equity is increasing or decreasing.

You will agree with me that analysing a statement of a company’s financial position that is the balance sheet using these categories and perspectives goes beyond looking at the numbers.

I will continue to bring to you other learnings impacted by different faculties of the prestigious business school, the Lagos Business School during my MBA program. Kindly like or comment if you learn new things beyond the convention of analysing the balance sheet of your company.

Written by HayRHay