4 New Life/A&S CE

Understanding, Analyzing and Interpreting Financial Statements

This course is included as part of your ILS LIFE/A&S Course Subscription

A financial statement provides a record of the financial activities and positions of a business during a period of time. These statements represent a means of communicating a given business’s financial information to different parties who then can base their decisions on the statistics provided. Note that a proper understanding of financial statements is paramount to an individual’s ability to make informed decisions including whether to invest in or grant credit to a business.

In addition, financial statements can help a business owner or shareholder evaluate the performance of the business over a particular period. This is very useful for a business owner since it helps them to evaluate what changes should be made to enhance business processes, or even could be used to determine what bonuses paid to management would be justified

Throughout this course, some basic accounting concepts will be covered that are a prerequisite for you to achieve a proper understanding of financial statements. Accounting is the first language of business and achieving a comprehension of the accounting techniques covered in this course will certainly pay dividends when it comes to interpreting financial statements.

This course covers the following topics:

• • Introduction to Financial Statements
  • Assumptions and Principles of Financial Statements
  • Overview of the 3 Financial Statements
  • Cash Flow Statement
  • Financial Statement Ratio’s
  • Basic Fundamental Analysis
  • Applications for Investing using Financial Statements

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Included as part of the ILScorp Life/A&S CE Subscription.

Access Duration from the Date of Purchase: 6 months
Credit Hours: 4
Credit Type: Life/A&S
Credit #: AIC #47532; MB #29899
Accrediting Provinces: BC, AB, SK, MB, ON

Sample of course material:

Users of Financial Statements

Users of financial statements can broadly be put into two categories: internal users and external users.

Internal Users

These individuals use financial information to plan, organize and run companies. Usually, they work for the company and hold positions such as financial directors, marketing executives, human resource directors and production managers.
Questions these users might ask are:

1. Do we have enough cash to pay our bills?
2. How much should we spend on marketing to maximize profits?
3. What price should we sell our products at to maximize profits?
4. How many people should we hire, or can we afford our existing employees?
5. Which product is the most profitable?

To answer these questions, internal users may seek to compare the profitability of business segments over time, analyze costs and forecast sales for a defined timeframe. The value of undertaking these types of activities is always conditional on the accuracy of the financial statements, and the internal user’s understanding of its components.

External Users

These users are not a part of the business and thereby view the company from a distance. Key examples of these types of users include investors and creditors.

Investors will use the contained financial information to determine whether the business represents a worthwhile investment. Similarly, creditors will use financial information to decide if they should lend money to a company, based on their analysis of whether the company can reasonably be expected to repay its debts or not.

In addition to these two standard examples, other external users include labour unions who use financial statements to decide whether a reporting company is paying employees a fair amount, or potential employees who may use financial statements to evaluate job prospects.

Business Activities Recorded in Financial Statements

Businesses engage in three types of activities: Financing, Investing and Operating. These activities are all recorded on financial statements so that stakeholders can analyze them. We provide a description of each below:

Financing Activities

To operate, a business needs to spend money. There are two ways to raise money: the company can borrow money from creditors (debt financing) or it can sell shares to investors in exchange for cash (equity financing).

Selling shares is less risky than taking on debt. Note that debt holders must be paid back before shareholders; therefore, debt holders have a right to the company’s resources before shareholders. If a company cannot repay its debt, then the company will be liquidated and the debt holders will receive the amount that they are owed. In this situation, once the debt holders are paid, shareholders receive the remaining assets, if any remain.

In contrast, once shares are issued a company is not obligated to repay shareholders for their investment, though they often do so. Many companies pay a shareholder a return on their investment so long as creditors have been paid. These shareholder payments are called dividends. Generally, dividends take the form of cash, but they can be paid through other means such as the granting of additional common stocks to common shareholders.

Investing Activities

Money raised from financing activities may then be invested, which is often the primary reason for raising money. Investing activities involves the purchase of assets to be used for business operations. Assets are resources that the company owns and controls. An asset is purchased to provide an economic benefit to the company.

Examples of assets include computers, machines, equipment, land and vehicles. Together these types of assets are called property, plant and equipment or PPE.   Other examples of assets are intangible assets such as Goodwill. Goodwill is the difference between the prices a company pays for an acquisition and the net value of the acquisitions assets.

Operating Activities

Now that the business has the required assets, it can undertake operations. The company uses the assets it bought to create goods that can be sold to consumers. The cash it receives for these goods is referred to as revenue.
The company also must pay for the materials that go into the production of these goods. These material costs are listed as expenses and often called Cost of Goods Sold.

Summary

1. Financing Activities: the act of borrowing money from lenders or issuing equity to investors so that the cash created can be directed to investing activities.
2. Investing Activities: the purchasing and disposing of assets that are to be used in operating activities.
3. Operating Activities: the day-to-day operations of a business that result in revenues and expenses.