KCQs Chapter 3

 

Chapter 3

In the third chapter related to introduction to financial statements, I got to know that are four major types of financial statement- income statement, balance sheet, statement of changes in equity and cash flow statement. The first statement is the income statement which tells us what is the profit generated by the business. Profit is equal to revenue minus expenses. As I understand this, if I am running my perfume shop business, I am interested in knowing the profit which I can get by preparing the income statement. The next statement is the balance sheet which sets out the assets, liabilities and equity. For my business, by preparing the balance sheet, I will know what are the assets (which are controlled by the business and will provide benefits), liabilities (which the business owes to others) and equity (which belongs to me). From the statement of changes in equity, I will know whether my equity has increased or decreased. If the business generates profit, equity will increase but if the business is making loss, equity will decrease. I understood about the connection between the income statement, statement of changes in equity and balance sheet and realise that profit from income statement is added to equity in statement of changes in equity which is finally shown under the equity section in balance sheet. Cash is very important for successfully running any business and I can get to know about the cash coming in and going out of the business from the cash flow statement. Another interesting thing that I got to know from this chapter was that I can use the financial statements to calculate various ratios which can help me in analysing the performance of the business.

In summary, I found the lecture related to financial statements very informative and useful for my future business. I am really looking forward to understand as to how to analyse the financial statements by ratios in the coming weeks. However, I still am confused about the concept of value which Martin talks about from time to time and hopefully the concept is cleared in coming weeks.