“Every debit entry must have a corresponding credit entry” was the official phrase of my accounting teacher in secondary school – I cannot believe I have forgotten her name, as it has been over a decade.
Accounting was one of my best subjects in high school, and I could speak to a wide range of topics spanning the balance sheet to the three-column cash book and even the ledger. You could not imagine my joy when I saw corporate financial accounting on the menu even if you wanted to. I had assumed it would be like the good old days but how wrong I was? This one was case driven!
The introduction of the five components of a financial statement – statement of financial position otherwise known as the balance sheet, statement of change in equity, statement of profit or loss, statement of cash flow, and the notes to the account was an eye opener – it was not as simple as it was in secondary school. The classes are case driven with a dual objective. First, I have to understand how to record these transactions as a bookkeeper and second, I must understand the implications of these numbers for decision-making as an analyst. I need to see beyond the numbers and read meaning into the health of the business in question and make sound business decisions such as investments, mergers, acquisitions, or even an outright shutdown.
Looking at these statements one by one, the statement of financial position shows the asset, liability, and owner’s equity of a business at a particular date. The other statements are produced over a period, typically a year. The statement of change in equity reports the changes in the company equity over a period. The changes generally reflected are: earned profits, dividends, the inflow of equity, withdrawal of equity, and net loss among others. The statement of profit or loss summarizes the revenue and expenses incurred during a specified period. The statement of cash flow provides us with information regarding all cash inflows from business transactions as well as investment sources and cash outflows to pay for business events and investments during a period. The notes to the accounts provide us with further explanations that were not captured in the other four statements.
“Increase your assets and reduce your liabilities” – a common investment phrase devoid of a clear-cut distinction between both. In this course, I have seen the correct description of assets as resources with economic value owned by a business and usually acquired with money while liabilities are things the business owes and usually take money out of the company. I also learned their sub-divisions into current and non-current and other complex scenarios.
Now, what is the essence of understanding these terms? Is it for a show? No, just as a doctor needs to understand the symptoms of a disease before treating a patient, as a business leader, I should understand the indicators of the health of a business of which financial standing is a critical one. In my career as a product manager, from this course, I will be able to accurately engage with the finance team on the internal performance of my product to the company as a whole, rather than just focusing on the external environment. Understanding of corporate financial statements would not only make me better on the job but would enable me to make more informed stock picks, thus building a tight and robust investment portfolio. This is a game-changer.
Light, Love, and Life
#CFA #MMBA4
