How To Take The Fear And Loathing Out Of Financial Statements


If you are like most right-brained, liberal arts-majoring, visual-learning communications professionals, then you probably avoided accounting classes like the plague in college. Calculus was the bane of your existence. You barely scraped by in trig. Communications as a profession sounded attractive because it meant interacting with people, thinking strategically, solving problems creatively - and it had absolutely nothing to do with numbers. Right? Wrong. Public relations and communications have morphed into business functions that require professionals to understand more than the nuances of rhetoric. Becoming strategic advisors to C-suite managers means speaking their language and understanding their problems from a bottomline perspective, especially in the wake of regulations imposed by Sarbanes-Oxley (SOX) and Regulation Fair Disclosure. In other words, brace yourself for a whole new reality - one that involves numbers. "Accounting and finance are essential parts of the language of business," says James Gentry, a professor with the University of Kansas' School of Journalism and Mass Communications. Translation: It's time to learn how to read a financial statement. Here's how. Accountant-Speak Yes, companies employ entire armies of accountants and lawyers for the sole purpose of understanding all things financial and regulatory. That does not mean that knowing a financial dialect - or at least a few key vocabulary words - won't enhance your value when shaping, implementing and executing business strategies. Here are the basic financial-statement terms you need to know before getting started: Balance Sheet: This shows the company's assets, liabilities and owners' equity. Income Statement: This shows what the company generated in profits or losses. Statement of Cash Flows: This shows the company's cash position. CGS: This stands for "cost of goods sold," and it represents the expenses incurred through the cost of manufacturing/creating/acquiring the product/service sold by the company. For a manufacturer, this is what the company pays for inventory; for the retailer, it's what the company pays suppliers; for the service business, this is usually a minimal value. Free Cash: This term is misleading, as it has nothing to do with "free;" rather, free cash is that which is left over after all necessary expenses have been paid. It allows the company to expand its productive capacity in various ways. In other words (and not surprisingly), free cash is a good thing. GAAP: This stands for Generally Accepted Accounting Principles, and it is the bible for financial accounting. Having a copy of this in your office never hurts, as it's a good reference for any perplexing accounting inquisition. FASB: This stands for the Financial Accounting Standards Board, and it is a nonprofit organization that aims to develop GAAP within the United States, and within the public's best interest. The Securities and Exchange Commission designed the Board to set accounting standards for public companies. AICPA: This stands for the American Institute of Certified Public Accountants, and it is the largest professional organization for accountants. Its two most visible practice functions are tax practice and independent audits. Once you are conversational in this financial lingo, according to Gentry, it's essential to find out how your company "keeps score," so to speak. This is usually done either through balance sheets and income statements, which use the accrual method, or through a statement of cash flow, which uses the cash method. It is important to note that different types of organizations have different things to consider when it comes to financial statements. Public Companies: Corporate regulations primarily focus on public companies, which now have to contend with a Public Company Accounting Oversight Board. Private Companies: According to Gentry, because banks and insurers require private companies to embrace regulations like SOX, most private firms now have audited financial statements. Then, if they want to sell to a public company, they must be in compliance with regulations. Nonprofits: Regulations have prompted nonprofits to create ethics codes, and CEOs/CFOs must attest to the accuracy and completeness of their financial statements. What's more, financial statements are more accessible to outside inquirers, making accuracy essential. With this basic knowledge in your communications portfolio, it's just a matter of (gasp) understanding the basic math behind the financial statements themselves. Take a deep, cleansing breath and refer to the sidebar below for a complete mathematical breakdown. CONTACT: James Gentry, jgentry@ku.edu Financial Statement Equations The Income Statement and Bottom Line Revenue - Cost of Goods Sold = Gross Profit/Gross Margin Gross Profit/Gross Margin - Operating Expenses = Operating Income Operating Income +/- (Other Revenue/Expenses*) +/- (Interest Expense/Interest Income) - Income Taxes = Net Income *Other Revenue/Expenses can include discontinued items, unusual/extraordinary expenses, changes in accounting principle, impairment charges, sale of investment or minority interest. Free Cash Net Cash from Operating Activities - Capital Expenditures = Free Cash Flow

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