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1. Introducing Financial Statements
To understand business, you need to understand financial statements. In this lesson, I introduce you to the Income Statement, the Balance Sheet and the Statement of Cashflows.
What are the 3 financial statements?
- Income statement
- Balance sheet
- Statement of Cashflows
What are the use cases for financial statement analysis?
- Purchasing shares of a company on the stock market
- Evaluate an acquisition target
- Valuing your company when raising capital
- Evaluating loan requests
- Assigning a credit rating
- Making investment recommendations to clients
Welcome to the first course on financial statements in Excel. This course aims to give users a high level overview of the Income Statement, Balance Sheet and Statement of Cashflows, and how to analyze these documents in Excel.
The course is ideal for the user who has a strong passion for business but has not yet learned how to read financial statements. When you begin your career, you may or may not have encountered financial statements in your day-to-day work. However, as you move up into management, the ability to understand financial statements becomes a huge advantage. Particularly when combined with another discipline, say operations or engineering. If you can't read financial statements, ultimately it can be difficult for you to move into senior management roles within a company. So, what role do financial statements play and why do they exist? Well, the role of financial statements is to provide information about a company's performance and financial position to a wide range of individuals, including a company's shareholders, management, lenders, and so on. Financial statement analysis often plays a role in a number of important business decisions, including purchasing share of a company in the stock market, evaluating a merger or acquisition target, deciding on the valuation of your company when raising capital, evaluating loan or credit requests, assigning a credit rating to a company, or making investment recommendations to your clients or team. When reading financial statements, analysts will want to examine the past performance of a company, but also create projections for the future. In this course, we'll focus on analyzing historic financial statements. But in the next course on this topic, I'll show you how to build future projections for all three financial statements. When we think about the performance of a company, our minds often jump to profit. Profit is defined as the difference between the amount of revenue earned in a business activity and the expenses, costs and taxes needed to run that business activity. Profit is calculated in the Income Statement. It's worth noting that profit is not the same as cashflow. If we provide a service or goods to our customer, but have not yet received the money, this is still declared as revenue. This often confuses people at the beginning, but I'll cover this critically important concept in detail during the course. Cashflows in a business are critical because, ultimately, cash is needed to pay employees, suppliers, and to continue as a going concern. The cashflows of a business are included in the Statement of Cashflows document. In addition to profit and cashflow, analysts will also want to look at the current financial health of a company - measuring its resources, such as property or cash, against the claims on those resources. For example, loans or creditors. The current financial health of a business is found in the Balance Sheet. To help us understand financial statements, I'm going to use a fictional company, MarkerCo, that provides IT hardware and consulting services to its clients. MarkerCo is a small business with relatively straightforward financial statements for us to analyze. We'll begin in the next lesson by reviewing MarkerCo's Income Statement.