In the CFA course at Lagos Business School, Dr. Francis Okoye has been facilitating sessions on corporate financial accounting, cost and management accounting, as well as quantitative methods in business for the MBA, Executive MBA, Modular Executive MBA, and custom programs. In one of the recent class sessions, I learned about the peculiar elements of financial statements in different industries. In an assignment from our facilitator which we used in this class session, we were tasked to download the annual reports of our different industries and rewrite the income statement, balance sheet, cashflow statement for the purpose of comparing them with each other to understand how each industry was different from the other.
Financial statements are an essential part of any business, and they provide a snapshot of the company’s financial health. However, the peculiar elements of financial statements vary across different industries and we got to learn that in this class session. For instance, manufacturing companies have some distinct different items on their accounts compared to the service and merchandising companies.
Manufacturing Industry: Manufacturing companies have three types of inventory accounts: raw materials, work-in-process, and finished goods. They also have several long-term fixed asset accounts.
Insurance Industry: Insurance companies also have unique items worth noting in their financial statements. One of the most significant differences is that insurance companies have float on their balance sheets. Float is the difference between the premiums collected and the claims paid out. It is essentially the money that an insurance company holds onto before paying out claims.
Banking Industry: Banks have some unique elements in their financial statements that you won’t normally find in insurance, or other sectors. The balance sheet shows the bank’s assets, liabilities, and equity, while the income statement shows the bank’s Gross earnings, expenses, and net income. Dr Francis also taught us that cash is considered the highest priority when writing the assets in the balance sheet in the banking industry which differs from other industries. In a bank’s annual report, the net interest income shows how much they make from loans and deposits. Then there’s also non-interest income and net interest margin, which is like a money gauge.
Service Industry: Service companies have unique financial statements that reflect their business model. In the service industry, the balance sheet includes accounts that are not present in the manufacturing and banking industries. For instance, service companies do not have inventory accounts like manufacturing companies. Instead, they have accounts such as accounts receivable, which represents the money owed to the company by its customers for services rendered.
They also have accounts such as deferred revenue, which represents the money received by the company for services that have not yet been provided. This account is not present in the manufacturing and banking industries. Another account unique to this industry is the unearned revenue account, which represents the money received by the company for services that have not yet been provided but will be provided in the future.
Despite the diverse landscapes we explored this week, we discovered common threads that bind all industries. There is a general financial statement structure that guides all industries even though they might be distinct in one or two ways. Dr. Francis Okoye’s emphasis on taking a practical approach when doing the assignment has empowered us to decode financial statements with confidence.
FLOATING