Demystifying business finance — or, Happy Income Tax Day today

Jeff Bernel

Column by Jeff Bernel

Business financial reporting can be confusing.  All business accounting reporting follows the rules set out by FASB,  the Financial Accounting Standards Board, a private, non-profit organization standard-setting body whose primary purpose is to establish and improve GAAP, Generally Accepted Accounting Principles. Essentially, the job of all certified public accountants is to audit and thus ensure all businesses comply with these standards, and to determine tax liability.

A financial statement consists of three main documents, a balance sheet, income statement and cash flow statement. Businesses measure their performance in line with a fiscal year, or a twelve-month period chosen by the business. Simply put:

A balance sheet is really nothing more than, “what does a business own (assets), minus what does the business owe (liabilities) at a particular point in time (usually monthly)?” Subtracting total liabilities from total assets is “shareholders’ equity,” or “what’s the business worth?”  Nothing more, nothing less.

An income statement is simply, “what was the total income of the business” minus “what were its total expenses” to run the business. Subtracting total costs from total expenses is the “profit or loss” of the company. As an aside, the average profit for U.S. businesses is 7.9% — or, for every dollar they invest, they gain 7.9 cents.

A cash flow statement is a financial statement that measures all cash inflows a company receives from its ongoing operations and external investment sources. It also includes all cash outflows that pay for business activities and investments during a given period. Stated another way, how much cash did the company have at the beginning of the period, minus what it spent, plus what it earned or borrowed — this will show how much cash it had at the end of the period. You really want this to be a positive result.

These principles can also be used to measure your personal financial situation. Quicken software can accurately create balance sheets, income and cash flow statements.

You may now think that an accountant has an easy job. Far from it.  FASB, GAAP and government accounting regulations must be followed by businesses and these rules are what keep accountants in business, as the Internal Revenue Service (IRS) uses very rigorous and detailed laws to determine a business’s tax reporting and responsibility. Accountants also create a reliable means to help investors assess what companies offer the best investment opportunities.

Just for fun, do a web search for your favorite publicly traded business’s annual financial reports. One can see just how complicated the basic three financial reports become. It’s not easy by a long shot.

A career in accounting can be a very interesting and rewarding one for those who enjoy the challenge of measuring the success or failure of a business.

Jeffrey A. Bernel, MBA, was a member of the faculty of the University of Notre Dame’s Mendoza College of Business for twenty years as a teaching professor and the director of the Gigot Center for Entrepreneurship. He was owner, chairman, CEO and president of American Rubber Products from 1979-1996 and chairman and owner of UniTek Sealing Solutions from 2006 to 2010. Jeff currently is the founding and current chair of the Healthcare Foundation of La Porte.

2 Responses to “Demystifying business finance — or, Happy Income Tax Day today”

  1. F. George Dunham, III

    Jul 15. 2020

    Thank you. I always get cash flow and income confused and that causes a lot of problems for me. You would think I could remember but it has been years since I went to college. I am very old and very fat now. Ha ha ha ha ha. It’s a good tip to do a web search for your favorite publicly traded business’s annual financial reports. I will try learning more looking at Disney because I love Mulan.

    Reply to this comment
  2. Jeff Bernel

    Jul 16. 2020

    You are welcome, George! Coca Cola and Kellogg’s annual reports are interesting, too.

    Reply to this comment

Leave a Reply