My stint with the subject, Accounting, was as student at my Alma mater. Other times were when I receive financial statements of some company’s or try to read through the annual report of my organisation that usually contains the financial statements. In all of these, I just gloss over it as “Please this section is not for me”. Not that I am scared of the financial statements. Rather, what goes on in my mind is, when will I be able to comfortably read through the financial statements of organisations that I am interested in and make sense of them and take informed decisions based on the information contained in them.
Having started my MBA program at LBS and looking at the courses for the semester. Low and behold “Corporate Financial Accounting”. In my mind was, Ok. I hope this should be it for me when it comes to understanding financial statements.
The first lecture on Corporate Financial Accounting at LBS was the killer punch I needed to kick start my journey into understanding financial statements, make meaning of them and understand Corporate Financial Accounting at large. The lecture started with the key terms on basic financial accounting and why we need to understand it. Should we invest in that business or should we not? Should we continue to be in that business or should we not.
Prof followed that up with the key financial statements, which we eventually learnt that it is not 5 but 4 + 1. I learnt about entity, which for accounting purposes, the company is a separate entity from its owner. The next was levels and flows. Levels being how much an entity owns as of a given date and flows as what an entity accumulates during a given period.
I leant about the three main accounts in a balance sheet and how they are related to each other using the basic financial accounting equation: A = L + OE. Assets (A) as the resources that are owned by a business or entity. Owners’ Equity (OE) which is owners’ equity or shareholder equity which consists of:
(a) The portion provided by investors
(b) the portion earned by the entity during the course of doing business.
The (a) part describes the contributed capital which consists of contributions that have been made to the entity by investors in exchange for a share of ownership or a piece of the business. The Liabilities (L), as the resources that are provided to the entity by individuals and or groups other than investors. Liabilities and equity are the ways the business or entity has financed its assets. The two allows us to see how much of the total assets is financed by debit and how much with the organization’s own funds. The difference between the two being that liabilities (debt) must be repaid whereas equity need not to.
With these few arsenals I was able to open my organization’s annual report to see the financial statements I had learnt. The statement of financial position or balance sheet, the statement of profit and loss or the income statement, the statement of cash flows, statement of changes in owners’ equity + the Notes to the financial statements. I was able to identify the levels in the balance sheet, Assets, Liabilities and Equity and identify the flows, revenue, and expense in my organization’s financial statements.
#MEMBA11
