This should be an interesting read, or not.
As you read, bear in mind that these are the thoughts of a colleague that dreads accounting, is surrounded by accountants, and even went as far as to study a similar course at University. Please do not be deceived, she does not understand accounting, but she will keep trying.
Who knows, maybe while trying to explain the course to you in this blog, she may gain some clarity as she types. If not, in God we trust. Enjoy.
Today, based on what was discussed in class in the past week, I will be talking a bit about Financial statements, Transaction analysis, and Business Analysis within the context of the competitive environment.
The only straightforward way to define Financial Statements is to see them as a means of communication. A way for a business to transmit information to stakeholders on its performance.
Who are the users of this statement and what are they using it for?
- Management: To track performance, and as tools to make decisions, and motivate teams.
- Customers: To judge the financial ability of a business to provide goods or services.
- Government: For Tax
- Investors: to determine the financial viability of a company (make dem no carry them go where dey no know)
- Competitors: For their strategy
- Employees: For their salary
- Lenders: To obtain critical information about the financial health and risks of businesses.
Then we have The Accounting Cycle.
There are 7 steps, and the purpose of this is to track the process of recording, and sorting, every form of payment made and received within a business during a particular accounting period.
- Source Documents (Invoices, Receipts, Bills) >
- Journal (Shows Transactions in Chronological Order) >
- Ledger (the accounts for the transactions of the business) >
- Trial Balance >
- Adjustments >
- Closing Account and Stock Valuation >
- Preparation of Final Accounts.
It’s important to note that recording a business’s transactions from start to finish, helps the business stay organized and efficient. So that when auditors or the Federal Inland Revenue Service (FIRS) come knocking at your door, you can easily support the items reported in your tax returns.
If I did not do a good job explaining the accounting cycle to you, you may be thrilled to know that there are accounting softwares that would make your life easier. Some of them are; ZOHO, QuickBook, FreshBooks, Sage, Wave, NetSuite, Kashoo, and One Up.
There are a set of rules for financial statements that have subsequently been adopted by most major financial markets around the world, International Accounting Standards (IAS) now known as (IFRS) International Financial Reporting Standards are Issued by the International Accounting Standards Board (IASB), an independent body based in London.
According to IAS 1 (international, accounting standard), a complete set of financial statements comprise:
- Statement of Financial Position (Formally Balance sheet, a snapshot of your company’s financial situation at a specific point in time.) (Total Assets = Liabilities+ Owners equity)
- Statement of Comprehensive Income – This contains the revenue and the expenses.
- Statement of Changes in Owners’ Equity – summary of the transactions that affected the shareholder’s equity. (Equity= Assets-Liabilities)
- Statement of Cash Flows. – summary of the company’s operational cash flows. Gotten from Operations, Investment, and Finance.
- Notes, – this is a summary of Accounting Policies and other explanatory information.
While we were trying to make sense of everything stated above, Michael Porter created a Value analysis.
According to Porter, the financial statements of a company are influenced by 5 forces that determine its competitive intensity.
Here are Porters 5 ways of analyzing competition within an industry.
- Threats of new entrants
- Bargaining power of buyers
- Bargaining power of substitutes
- Threats of substitutes
- The intensity of competitive rivalry.
While analyzing the broader business environment, it is imperative to understand thatthe quality of your analysis is dependent on the effectiveness of your business analysis.
To analyze a Business environment, you first need to know its life cycle, inputs, Outputs, Buyers, competition, financing, Labor, Governance, and Risks.
There are lots of concepts that we need to know, however, it will be saved for the next article, at this point there are 718 words, and this is not a textbook.
Till we meet again Next week.