Beginners Guide to Understanding Finance

You don't need a $100k debt or Big 4 job to understand finance.

You need to understand :

- Income Statement

- Balance Sheet

- Cashflow Statement

Here's a FREE guide for beginners :

Each financial statement has a specific job to do. By themselves, they give you a lot of information.

But the magic comes when you combine them together.

Learning how to read the financial statements offer many details about a company, making it highly advantageous as a tool.

Let's learn how to read it.

The Income Statement

First is revenue. It's how much money we made.

Below that cost of cost of goods sold. It's the cost to produce.

Subtract COGS from Revenue to get gross profit.

Subtract out all our expenses from the gross profit.

Then our taxes.

We now have our net profit.

Balance Sheet

The Balance Sheet shows the assets, liabilities and net worth of a company.

The Assets and Liabilities section of the balance sheet indicates what a company owns, owes, and what is left over.

Assets - Liabilities = Equity.

Cash Flow Statement

The Cash Flow Statement shows the sources and uses of cash in and out of the business. This allows us to see where cash is coming into the business from and where cash is spent.

What you've learned so far:

- Income Statement shows us how much $ you've made

- Balance Sheet shows us what you own, owe, and what's left over

- Cash Flow Statement shows us where cash is coming in and out

The magic of the 3 statements is in how they connect to each other. Each statement has parts that can be found on the other statements.

On the income statement, we see a net profit of 20k. That 20k is seen on the balance sheet and the cash flow statement.

On the balance sheet as part of Retained Earnings and on the cash flow statement as the first item of cash from operating activities.

However, the 20k is not always cash. There could be non cash items such that affect it.

We have to net these non cash charges out. We haven't paid our suppliers 15k yet so we still have that cash, however, we haven't received 10k from our customers yet, so we don't have that cash yet.

From the cash flow statement, we see new debt was a source of cash. This is also reflected on the balance sheet. We also see 10k spent on CAPEX and 55k on from new shares.

In total, we have 25k from operating, -10k used to invest, and 85k from financing. For a total of 100k

We now know that the ending cash balance for the year should be 100k. Can we see that anywhere?

Yes.

On the balance sheet. The balance sheet shows a cash balance of 100k.

Now you understand

- The Income Statement

- The Balance Sheet

- The Cash Flow Statement

- How to read each statement

- How the statements interact with each other

- How items from one statement affect the other statements

If you need help with any parts of the CFA exam I offer tutoring or if you need to get a study plan so you can get ahead of everyone I can give you the plan I used to pass over the 90 percentile mark.

Have a great weekend.

Tristan