I have worked as an accountant for over a decade and continuously updated my knowledge in the field of accounting, finance, taxation and budgeting. I have also taught accounting, cost and management accounting at the elementary, intermediate and professional levels at the tertiary institution and professional classes; I would not be wrong to say accounting and finance run through my blood.
My lecturers in CFA at LBS gave an end-to-end simplified and practical approach that can be understood by a non-finance and aspiring individual. This further broaden my knowledge of finance and accounting and how to present and analyse a financial statement to a non-finance person;
My first and second classes were very interesting; they remind me of my time at the university… the key highlights for me are the definition and understanding of a practical approach to accounting which are stated below:
1- Statement of Financial Position: It is a statement that summarises the financial position of an entity and it contains assets, liability and shareholders’ funds. Arithmetically, the balance sheet equation is given as; Asset= Liability+ Shareholders’ funds.
a. Assets: an economic resource controlled by an entity that has the potential of generating economic benefits. Assets can be classified as Non-Current and Current Assets or as Income generating or non-income generating assets. Assets could be fixed by nature, current assets, financial and intangible assets.
b. Liabilities: It is a present obligation of an entity as a result of past events or accounting transactions, the settlement of it will lead to cash payment to the creditors. It is simply a debt owned by a corporate entity or individual. Liability could be for a long term or short term depending on the need and nature of debts. Liability could be in the form of Corporate Bonds, Debentures, Fixed Income Notes and other non-interest-bearing debt.
c. Owners’ Equity: As the name implies, it is the capital contribution of the shareholders and wealth generated by the company assets. It contains the Share Capital, share premium, reserve and retained earnings.
2. Income Statement and other Comprehensive Income: It is a statement that contains the profit or loss of an entity. The major component of an income statement is revenue and expenses.
a. Revenue: It is an inflow of economic benefit generated by an entity during the ordinary course of business activities. It could be seen as a consideration earned or received as a result of sales of goods or services rendered to clients
b. Expenses: are costs incurred during the ordinary course of the business, expenses are recorded whether or not they have been paid for. Expenses can be classified into; Personnel expenses, depreciation and other operating expenses.
It should be noted that when revenue is greater than expenses, the difference is profit and when revenue is lesser than expenses, the difference is loss. This can be represented arithmetically below;
Revenue > Expenses = Profit
Revenue < Expenses = Loss
3. Cash flow Statement: It is a statement that shows the liquidity position of a company. It can be segmented into three categories; Operating Cash Flow, Investing Cash Flow and Financing Cash Flow.
a. Operating Cash Flow: is a cash flow generated from the ordinary course of the business activities, it could be inflow or outflow.
b. Investing Cash Flow: a cash flow generated from an investment decision in financial assets, fixed assets and other asset classes.
c. Financing CashFlow: this is a cash flow generated as a result of financing activities. It could be to raise additional equity capital or a capital reduction decision.
Cash flow could be presented as follows:
Operating Cash Flow + Investing Cash Flow+ Financing Cash Flow= Net Cashflow +Opening CashFlow=Closing Cash and Cash Equivalent.
4. Statement of changes in equity:
It is a statement that contains movement in the owners’ equity. It recorded the movement in share capital, premium, and retained earnings. Reserves and non-controlling interest.
…….the analysis financial statement will be discussed in part 2……..