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James Bandler
James P. Bandler is President and
Chief Executive Officer of an investment
management company. He received his The Big Idea
MBA from Harvard Business School Reading and understanding Financial Statements has always
and his BA with Distinction from been considered a difficult task to most. These days, financial
Stanford University. statements are not solely for accountants, economists and
businessmen. Knowing how to read and understand financial
statements can help you know your company better, can help you
James is the author of the bestselling
plan investments, spot industry trends and can help you find a
book: How to Use Financial
Statements. Bandler has also been better job.
published in the Wall Street Journal.
You do not need to be an accountant to use the information on a
basic statement. All you need are a few basic concepts. This book
gives you a clear and simple way of reading and understanding
financial statements. It puts complex ideas into plain and easy to
understand language.
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How to Use Financial Statements By James Bandler
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How to Use Financial Statements By James Bandler
A balance sheet, therefore, should always have equal assets to liabilities and
owner's equity. To get owner's equity, you have to reorganize the equation as:
Owner's Equity = Assets Liabilities
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How to Use Financial Statements By James Bandler
The balance sheet can tell you the amount the company has in debt in relation to its
owner's equity. This is known as Leverage. A company is said to be highly leveraged
if total liabilities are large in relation to owner's equity. A company which has high
owner's equity in relation to its liabilities is low leveraged and is less risky than the
former.
Revenues (net sales). These are products sold or various sales and services
rendered regardless if cash was received. It can also come from rentals, interest
earned, commissions, etc.
Cost of goods sold. These are all cost allocated to inventory that was sold during
the period. It includes labor, materials and overhead.
Gross Profit. It is the difference between revenues and the cost of goods sold
Operating expenses. These are expenses incurred to keep the business running
day to day. General and administrative cost includes salaries and wages, payment
for utilities, insurance, rental and other expenses. Selling expenses includes all
forms of advertising, cost of supporting sales function, salaries and commissions of
sales personnel.
Provision for income tax. This is the income tax expense and is based on the
company's income tax rate.
Net income. This is also called the “bottom-line”. It is what is left after all cost of
doing business is deducted from revenues earned.
The income statement directly affects the balance sheet. Sales can lead to an
increase in accounts receivable. Cost of goods sold can lead to a decrease in
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How to Use Financial Statements By James Bandler
Also deducted from cash are investment activities such as additions to property,
plant and equipment.
Cash from financial activities can increase or decrease cash flow. Payment of long-
term debt reflects a decrease of cash flow while an increase of long term debt
provides cash and is added to income.
It is computed as:
Cash revenue = accrual revenue + beginning accounts receivable - ending
accounts receivable
Cost of goods sold / production cost = beginning accounts payable + purchases -
ending accounts payable
Operating expense = total beginning accrual expenses - total ending accrual
expenses.
The primary purpose of cash flow statement analysis is that a company should not tie
up its funds in assets that are not able to generate cash for the company to meet its
obligations. Analyzing cash flow of a company should be done over an operating
period of several years and in detail.
A growth or decline in a company's business, its ability to create cash or meet its
obligations, its efficiency and profitability can affect the balance sheet, income
statement and cash flow.
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How to Use Financial Statements By James Bandler
inventory.
Average cost method. Reports as cost of sale the average cost of its inventory.
Depreciation methods
Straight line method. Applies a consistent rate of asset cost to each period
Service Companies
Service companies such as banks, public utilities, hotels, hospitals, data providers,
travel agents differ from product or merchandise oriented companies in the way they
report their financial statements.
Service companies differ on how they generate revenues and other financial
characteristics. They can be grouped into:
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How to Use Financial Statements By James Bandler
What are the Rules that Prepares of Financial Statement Must Play
By?
To present the reader with an accurate and fair presentation of financial information,
financial statements are prepared in accordance with the Generally Accepted
Accounting Principles or GAAP. The GAAP standardizes how financial
statements are prepared so that you can effectively compare a company with
another in the industry.
Most GAAPs are defined and served as guides for reporting and reading a financial
statement. All information or disclosures needed by the reader to understand the
financial statements, the company's accounting practices as well as the auditor's
opinion can be found in the footnotes of a financial statement.
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How to Use Financial Statements By James Bandler
2. Current ratio and quick ratio. Measures how liquid a company is.
Quick ratio = total cash, short term marketable securities and accounts
receivable current liabilities
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