Contributed by Dan Shuda, Accounting Instructor
In the accounting program here at Globe University in Eau Claire, we teach the importance of recognizing, understanding and interpreting the information in financial statements. It struck me one day how this process is very similar to how a doctor looks at the physical systems of a patient to determine health or illness. I would like to explore those patterns in this post. This should provide insight on the need for accounting and business students to have a keen view of this area.
To set the stage here, we want to define the three most important financial statements and the corresponding human systems. This will allow us to examine some of the positive and negative data that these statements provide.
The three financial statements we will be reviewing are
- Balance sheet
- Income statement
- Cash Flow Statement
The balance sheet shows the bones of the corporate body. A company’s core financial elements like cash, receivables, inventory, fixed assets, liabilities and equity resemble the skeletal system. This is the foundation of the financial position of the company at a point in time.
The income statement mirrors the muscular system. It provides the elements to move the body, or in this case, the company over time. The income statement is a presentation of the income and corresponding expenses which provide the net income over a set time period. This shows how the company moves forward in profit or backward with losses.
Finally, the cash flow statement acts as the circulation system of the body. Cash flows are like blood flowing through the human body as they increase and decrease. A steady flow of cash to the corporate body is as important as a steady flow of blood to the human body. Neither will function for long without that flow.
Accounting students learn that looking at the financial statements will give them insight into the financial health of a company. Learn more about a degree in accounting at http://www.globeuniversity.edu/.