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Financial Statement Literacy
Financial Statement Literacy
Herbert Kalman
A Silver Fox Advisor
The primary purpose of a financial statement is to provide reliable information about a company's financial performance to help owners and management make informed business decisions. These standardized reports act as a "report card" of a business's activities.
Key Objectives
- Measure Performance: They allow management to track progress against goals, identify areas for cost-cutting, and plan future budgets.
- Facilitate Decision-Making: Management uses these statements to decide whether to accelerate growth based on a company's ability to generate profit and repay debt.
- Outside parties: Management will need to provide and explain financial statements when seeking debt.
Core Financial Statements
Each of the statements serves a distinct but interrelated function:
- Balance Sheet: Acts as a "snapshot" of what a company owns (assets) and owes (liabilities) at a specific point in time. Each line item should have a supporting schedule for management use.
- Income Statement: Summarizes revenues and expenses over a period to show if the company made a profit or a loss.
- Cash Flows Statement: Shows the changes in the elements of cash flow during the reporting periods.
This article will discuss the Balance Sheet and Income Statement.
Financial Statement Example
Following is the balance sheet of ABC Distribution, Inc. (a hypothetical company) as of December 31, 2025.
Supporting the balance sheet should be supporting schedules for all accounts such as:
- Bank reconciliations
- Accounts receivable aging
- Inventory summary
- Listing of prepaid expenses and other current assets
- Summary depreciation schedule
- Notes payable transaction summary
- Accounts payable aging
- Accrued liabilities
- Changes in retained earnings
The following are examples of some balance sheet schedules.
Following is the income statement of ABC Distribution, Inc. for the year ended December 31, 2025.
Many of the income statement accounts have supporting schedules. Following are just a few examples.
Like many businesses, income earned by ABC Distribution is taxed to its owners. Owners will generally take distributions from the company to pay taxes and for personal use. The statement of retained earnings reflects such distributions and their impact on retained earnings.
Summary
These financial statements provide significant information regarding the health of the company including:
- Days of receivables outstanding-45
- Current ratio-2.96Quick ratio – 1.43
- Cash ratio - .01
- Debt to Equity Ratio-26.86%
- Debt Ratio 19.26%
- Interest Coverage Ratio 3.94%
The financial statements and supporting schedules provide management with information necessary to make good management decisions. The value of this information increases when the report is provided to management early in the month following.
Further analysis and a description of ratios will be discussed in the July SFA newsletter.
Leadership Training/Mentoring Corner - May Situation
THE LEADERSHIP TRAINING/MENTORING CORNER
In the August 2025 Newsletter, we started a series called “The Leadership/Mentoring Corner” in which we posed a thought-provoking situation for you to think about and put yourself into, asking yourself, “What are your next steps?”
MAY LEADERSHIP SITUATION
William started a commercial equipment sales and maintenance business some 30 years ago, and recently, William’s son, Adam, joined the business as an Executive Vice-President and heir apparent to succeed his father. Adam graduated from a prestigious institution of higher learning with a degree in Government Studies. Adam’s ultimate goal in life is to run for public office and let the business run itself, only attending management meetings as needed and collecting a check each month as a management fee. Christopher is the Company’s CFO and has been with the business for 25 years.
After the first year Adam was with the business, he began to sell commercial business products at a huge discount to businesses that Adam thinks would be able to support his political career in the very near future. Christopher discovers the discounts Adam has given customers and confronts Adam. Adam gets defensive and tells Christopher that these situations will pay off in big dividends once he gets elected and his political career takes off. Adam tells Christopher not to discuss this situation with anyone and not to bring it up ever again, or he could be fired.
When the business’s annual financial statements are completed, William notices the big dip in annual revenues and the huge increase in cost of goods sold margin, and a break-even bottom line. William confronts Christopher, who responds that business isn’t what it used to be, and customers don’t want to pay higher prices; they may be buying cheaper products from foreign suppliers.
Christopher shares all this information with his spouse, who tells Christopher that he needs to tell William what is really going on or leave the business and find another job.
What should Christopher’s next steps be?
Please provide us with a brief write-up of what Christopher’s next steps are. Send your write-up to Lynn Rosado at [email protected]
In our June 2026 Newsletter, a team of Silver Fox Advisors will provide responses to what they would have recommended to Steve that he should do based on the situation detailed above.
If you need assistance in becoming a better leader, I recommend you start by contacting the Silver Fox Advisors. Silver Fox Advisors are former or present business owners themselves, and they have leadership experience in running a business, and in some cases several businesses, and have dealt with unforeseen and unplanned situations throughout their careers. We encourage you to visit our website at www.silverfox.org to select a Silver Fox Advisor and also to learn more about the Silver Fox Advisors, as well as our great programs and community outreach endeavors.
