Understanding Where You Stand
November 29, 2011
Louisiana Tech University
Technology Business Development Center
Local business people spent the afternoon learning about financial statements and how to best use the information they provide in evaluating their company, especially in comparison to industry standards and previous years from Cooper Cochran of Louisiana Tech University’s Technology Business Development Center. Cochran discussed the balance sheet, the income statement, and the statement of cash flows, their functions and components, ratios using their information, what information these statements provide, and how they can be helpful in making decisions about a company.
- Purpose of Financial Statements
Cochran explained the usefulness of financial statements in evaluating a company, providing a historical picture of a company, and in decision-making.
- Balance Sheet, Income Statement, and Statement of Cash Flows
Cochran explained what each statement is, what information it provides, its components, and how each statement should be set up. He explained what classifies as each component, for example, on the balance sheet what classifies as a cash or cash equivalent. For the balance sheet he also explained the cash method vs. accrual method of accounting. For the income statement he also explained horizontal and vertical comparisons and how tax liability is determined.
- Ratios and Comparison to Industry Standards
Cochran explained the following ratios which use figures from the financial statements and how to calculate them: working capital, quick ratio, current ratio, debt to worth ratio, profit margin on sales, accounts receivable turnover, inventory turnover, accounts payable turnover, and debt service ratio. Each attendee was given a “Understanding Where You Stand” booklet, and copies of Best Buy’s financial statements which were used as examples. Using the book, Financial Ratios Benchmarks by the Risk Management Association, Cochran explained how to compare a company to industry standards using financial statements from Best Buy as an example. He also discussed some reasons why a company’s percentages may be different from those of industry standards. He discussed how each statement and these ratios can be used in decision making especially in the areas of future planning, administration, and evaluation of a company.
- Users of Financial Statements Outside of the Company
Cochran discussed the different types of people outside of a company that typically use a company’s financial statements, such as investors, creditors, potential employees, lenders, and government entities, and how they might use the information provided to make decisions about a company.
At the end of the workshop, Cochran urged attendees to analyze their own companies, compare them to industry standards, look for areas of improvement, and make necessary decisions and changes. Cochran will do one-on-one sessions with some attendees to look at their own financial statements, calculate those ratios, and compare their company to industry standards.
TBDC Understanding Financial Statements