The world of accounting and paperwork is a dark, dark forest to me indeed, and if it weren’t for Patrisha, my incredibly organized better half, I’d be totally lost. There is, however, one piece of paper that excites me like none other, and it is the Financial Statement! When I learned what is financial statement, it changed my life forever…
WHAT IS FINANCIAL STATEMENT
When you were in high school, your progress was registered in a document called a Report Card. A new report card was generated every grading period of your schooling career, and represented a snapshot of your academic circumstance at that moment. As part of this process, a grade point average (GPA) was calculated based on all of your grades. This GPA was important because it was considered by colleges to determine whether you are worthy of admittance, and whether you deserved any scholarships.
In the world of finance your progress is registered in a document called a Financial Statement. Financial statements of financially sophisticated people vary all the time, and are nothing more than a report card of their financial health at a specific time – a snapshot, if you will. When an individual applies for a new car loan, a mortgage, or to get funds for a start-up business, his financial statement is evaluated by the lending entity to determine credit worthiness. Interestingly, the soundness of the financial statement impacts not only the decision to lend money, but also the terms of the loan – the stronger the financial statement, the better the terms.
Similarly to your high school report card, an updated financial statement is generated periodically, usually quarterly and annually. A financial statement tracks four main components: income, expenses, assets and liabilities. When these are tallied-up, what you get is your Cash Flow and Net-Worth. Your Cash Flow and Net Worth are likened to your GPA. It helps banks and other major investors determine whether or not you are worthy of working with, and if so, to what degree.
Now – Financial Statements of financially sophisticated people are often comprised of hundreds of pages. It is a good idea, however, to boil all of that information down to the lowest common demonator- this makes it easy to follow. I did it, and there’s a story behind how and why that I’d like to share with you…Please continue to read at BoggerPockets.