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HOW TO WRITE AND READ A FINANCIAL STATEMENT

Ugochukwu Ugwoke Written by Ugochukwu Ugwoke · 2 min read >

In September of this year 2022, I got admitted into the Full Time MBA programs at Lagos Business. The admission is a dream come true for me as I have always wanted to have a taste of the rich fountain of knowledge streaming forth from the walls of this prestigious citadel of learning. Since resuming formal classes some weeks ago, the lectures have been very insightful and impactful. As students of management, we are taught how to manage, organize and lead organizations and companies. In this blog post which I will be making three times a week, I will be sharing with you the things I have learnt from my MBA classes at Lagos Business School.

To begin with, one of the things I learnt in the very first week of our resumption is how to write and read a financial statement for an organization or a business entity. By a way of definition, a financial statement is a medium of communicating financial accounting information to shareholders and other stakeholders in a business or organization. A financial statement shows you where a company’s money came from, where it went, and where it is now. Ordinarily, it falls under the duty of the director of an organization to prepare a financial statement but then, in most cases, the director delegates the accountant to perform this duty in their name. In other words, it is not the primary responsibility of the accountant to write a financial statement. He or she does so only by delegation.

There are four main types of a financial statement. They are: balance sheets, income statements, cash flow statements, and statements of shareholders’ equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time. Cash flow statements indicate the exchange of money between a company and the outside world over a period of time. Lastly, statement of shareholders’ equity shows changes in the interests of the company’s shareholders over time.

A financial statement is important for so many different reasons. For instance, managers of organizations use financial accounting information to make three basic types of decisions in a business: operating decision, investing decision and financial decision. Investors and analysts use financial accounting information to decide whether to buy or sell a stock. Lastly, lenders and rating agencies use accounting information to help decide on a company’s creditworthiness and lending compliance with law.

To prepare a financial statement, the primary working tools of the accountant are the source documents, journal, ledger, and balance information. The source books are invoice and receipt. Without these two, it will be difficult for an accountant to make an informed and complete financial statement. That is why record-keeping is very essential in the art of accounting. Without a proper recording and documentation of information, vital data and accounting information will be lost.

To conclude, every financial statement must contain these five essential elements: asset, liability, equity, revenue and expense. Assets are the things that the company owns that have value. Liabilities are amounts of money that a company owes to others. Equity is the money that would be left if a company sold all of its assets and paid off all of its liabilities. This leftover money belongs to the shareholders, or the owners, of the company. Revenue is the income generated while expense is the amount spent from what is generated.

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