Financial Statement Analysis
A Resource Guide
Virginia Small Business Development Center Network
(Revised for the VSBDC by Henry Reeves 3/22/2011)
|Topic |Page | |Introduction |3 | |Importance of Financial Statements |4 | |Collecting and Managing Data |5 | |The Income Statement |7 | |The Balance Sheet |9 | |Reconciliation of Equity or Statement of Changes in Stockholder Equity |12 | |Statement of Cash Flows |12 | |Notes to Financial Statements |13 | |Financial Ratios – Explanation |13 | |Key Terms and Concepts |20 | |Financial Statements as a Management Tool |24 | |Three Case Studies |32 | |Figure 1: Summary Table of Financial Ratios |36 | |Figure 2: K-L Fashions, Inc. Financial Statements |38 | |Figure 3: Breakeven Analysis |46 | |Figure 4. - Sample Cash Flow Statement (without numbers): |47 | |Conclusion |48 | |Sources of Financial Analysis Information |49 | Introduction
Financial statements provide small business owners with the basic tools for determining how well their operations perform at all times. Many entrepreneurs do not realize that financial statements have a value that goes beyond their use as supporting documents to loan applications and tax returns.
These statements are concise reports designed to summarize financial activities for specific periods. Owners and managers can use financial statement analysis to evaluate the past and current financial condition of their business, diagnose any existing financial problems, and forecast future trends in the firm’s financial position.
Evaluation pinpoints, in financial terms, where the firm has been and where it is today. Diagnosis determines the causes of the financial problems that statement analysis uncovers and suggests solutions for them.
Forecasts are valuable in statement analysis for two reasons: You can prepare forecasts that...