A guided tour of the financial statements

This chapter will introduce you to the financial statements. The idea at this stage is to give you an overview, and to keep it simple. By the end of this chapter, you will know what you are looking at when confronted with a balance sheet, an income statement, or a cash flow statement. You will understand the basic information that these statements provide, and you will be equipped with some of the key questions that typically arise when reading these statements.

Our approach will be to consider the fictional case of Albert, who has set up a small business, which comprises a single employee making furniture. You will be presented with the financial statements for Albert’s business, and we will go through the information that these provide. We will adopt a similar approach in the next chapter, using the fictional case of a consultant called Sarah. In her case, we will adopt a much deeper and more questioning approach, for example exploring the reasons why the financial statements are designed as they are, and the ways in which each of the financial statements links with one another. In Albert’s case, however, we will keep it simple. This will be a helpful foundation. At later stages in the book, when the content becomes broader and deeper, you might like to refer back to Albert. If you can read and understand the financial statements for his business, and if you know the right questions to ask, then that is a great starting point. Everything else in the book is really just building on this foundation.