This course explains how to read and interpret the financial statements of a business enterprise. It is not an accounting course and it is written by a non-accountant for non-accountants. The purpose of the financial statements of a company is to provide information on the profitability and economic well-being of the organization. Accounting and the corresponding financial statements are the “language of business” and allow business owners, investors, bankers, and others to understand how the business is doing. Everyday hundreds of financial transactions take place in the normal course of business and without some mechanism to compile and organize the transactions they would just be a mindnumbing jumble of data. To bring order to this chaos, accountants developed standard reporting guidelines for business data. The guidelines allow us to summarize a large number of transactions into groupings of similar transactions.
Trang 1How to Read a Financial
Statement
A Comprehensive Guide for Students to Master Business Finance
Written for Aspiring Financial Leaders in Vietnam and Beyond
May 2025
Trang 2Mục lục
1 Introduction: Unlocking the Power of Financial Statements 4
1.1 Why Financial Statements Matter 4
1.2 Who Uses Financial Statements? 4
1.3 Whats in This Book? 5
1.4 Case Study: Mias Investment Decision 5
1.5 Finance in Action 6
1.6 Exercises 6
2 Financial Reporting 6 2.1 Purpose of Financial Reporting 6
2.2 Accounting Standards 6
2.3 Key Components 7
2.4 Example: TechNova Software 7
2.5 Example: GreenLeaf Cafỗ 7
2.6 Real-World Example: VinFast 8
2.7 Case Study: Linhs Loan Application 8
2.8 Finance in Action 8
2.9 Exercises 8
3 Balance Sheets 8 3.1 Components 9
3.2 How to Read a Balance Sheet 9
3.3 Example: TechNova Software 9
3.4 Example: GreenLeaf Cafỗ 10
3.5 Real-World Example: Apple 10
3.6 Case Study: Mias Investment Analysis 10
3.7 Finance in Action 10
3.8 Exercises 10
4 Income Statements 11 4.1 Components 11
4.2 Analyzing an Income Statement 11
4.3 Example: Sunny Farms 11
4.4 Example: GreenLeaf Cafỗ 12
4.5 Real-World Example: Netflix 12
4.6 Case Study: Minhs Cost-Cutting Plan 12
4.7 Finance in Action 12
4.8 Exercises 12
5 Statement of Cash Flows 12 5.1 Categories 13
5.2 Direct vs Indirect Method 13
5.3 Example: TechNova Software 13
5.4 Example: Sunny Farms 13
Trang 35.5 Real-World Example: Amazon 13
5.6 Case Study: GreenLeaf Cafỗs Expansion 13
5.7 Finance in Action 14
5.8 Exercises 14
6 Statement of Retained Earnings 14 6.1 Purpose 14
6.2 Example: GreenLeaf Cafỗ 14
6.3 Example: Sunny Farms 14
6.4 Real-World Example: Starbucks 15
6.5 Case Study: TechNovas Growth 15
6.6 Finance in Action 15
6.7 Exercises 15
7 Ratios 15 7.1 Key Ratios 15
7.2 Example: TechNova Software 16
7.3 Example: GreenLeaf Cafỗ 16
7.4 Real-World Example: Tesla vs Ford 16
7.5 Case Study: Sunny Farms Investment Appeal 16
7.6 Finance in Action 16
7.7 Exercises 16
8 Financial Analysis 17 8.1 Steps 17
8.2 Example: TechNova Software 17
8.3 Real-World Example: VinFast 17
8.4 Case Study: Mias Investment Decision 18
8.5 Finance in Action 18
8.6 Exercises 18
9 Common Mistakes in Reading Financial Statements 18 9.1 Common Pitfalls 18
9.2 Example: TechNova Mistake 19
9.3 Example: GreenLeaf Cafỗ Mistake 19
9.4 Real-World Example: Amazon 19
9.5 Case Study: Sunny Farms Misstep 19
9.6 Finance in Action 19
9.7 Exercises 19
10 Applying Financial Statements in Real Life 19 10.1 Example: TechNovas Pitch 20
10.2 Real-World Example: Highlands Coffee 20
11 Summary 21 11.1 Finance in Action 21
Trang 411.2 Exercises 21
Trang 51 Introduction: Unlocking the Power of Financial Statements
Imagine youre Mia, a university student in Hanoi with $5,000 saved from tutoring You hearabout GreenLeaf Cafỗ, a local business seeking investors to open a second location Theowner hands you a folder of financial statementsbalance sheets, income statements, and cashflow reports It looks like a puzzle! Should you invest your savings? Financial statementsare your key to answering this question Theyre like a companys report card, revealing itsfinancial health through numbers: how much it earns, what it owns, what it owes, and howcash moves through the business
This book, How to Read a Financial Statement, is designed to make you a financial detective.
Whether you dream of launching a startup like VinFast, investing in global giants like Apple,
or managing your personal budget, understanding financial statements is a superpower.Well break down each statement with clear explanations, relatable examples, and hands-onexercises to make finance exciting and approachable for students like you
1.1 Why Financial Statements Matter
Financial statements are essential for everyone, not just accountants They help:
• Entrepreneurs evaluate business ideas For example, Mia can assess if GreenLeaf
Cafỗ is a safe investment
• Investors decide whether to buy stocks in companies like Tesla or Samsung.
• Managers make decisions about hiring, expansion, or cost-cutting.
• Students build skills for careers in business, finance, or entrepreneurship.
Think of a balance sheet as your personal budget: it shows what you own (savings, phone)and owe (student loans) An income statement is like tracking your part-time job earningsminus expenses These documents give you the power to make informed choices, whetheryoure investing $5,000 or planning a career
1.2 Who Uses Financial Statements?
Stakeholders include:
• Investors: Check profitability and growth potential (e.g., VinFasts revenue from
elec-tric vehicles)
• Creditors: Banks assess loan repayment ability.
• Regulators: Ensure compliance with laws.
Trang 6• Employees: Understand company stability for job security.
• You: Gain insights for personal or professional decisions.
1.3 Whats in This Book?
This book covers:
1 Financial Reporting: The framework of financial data.
2 Balance Sheets: What a company owns and owes.
3 Income Statements: How profits are generated.
4 Statement of Cash Flows: Where cash comes and goes.
5 Statement of Retained Earnings: How profits are used.
6 Ratios: Tools to measure financial health.
7 Financial Analysis: Combining data for decisions.
8 Common Mistakes: Pitfalls to avoid.
9 Applying Financial Statements: Real-world applications.
10 Summary: Key takeaways and next steps.
Each chapter includes examples (e.g., fictional startups like TechNova Software, real panies like Highlands Coffee), Finance in Action stories, and exercises to practice yourskills
com-1.4 Case Study: Mias Investment Decision
Mia, a business student, wants to invest in GreenLeaf Cafỗ She reviews its financial ments:
state-• Balance Sheet: $100,000 in cash, $50,000 in liabilities.
• Income Statement: $200,000 revenue, $50,000 net income.
• Cash Flow: Positive operating cash flow.
By the end of this book, youll analyze businesses like Mia, spotting opportunities and risks
Trang 71.5 Finance in Action
Mias friend, Linh, analyzed a local gyms financial statements and noticed it was losingmoney on unused equipment despite packed classes Instead of investing, Linh suggestedrenting equipment, saving the gym $20,000 annually The owner hired her as a consultant!
1.6 Exercises
1 Write a 200-word paragraph: Why should a student like you learn financial statements?
2 List four stakeholders who use financial statements and explain their interests
3 Think of a local business (e.g., a cafỗ in Hanoi) How might its financial statementshelp its owner?
4 Research Highlands Coffees parent company (Jollibee) What type of financial datamight they report?
5 How can financial statements help you plan a personal budget?
2 Financial Reporting
Financial reporting is how companies communicate their financial performance and position
to stakeholders like investors, creditors, and managers Its like a businesss biography toldthrough numbers, ensuring transparency and trust Companies produce reports like balancesheets, income statements, and cash flow statements, following standardized rules to makedata comparable across businesses, from startups to giants like VinFast
2.1 Purpose of Financial Reporting
Financial reporting serves several goals:
• Transparency: Shows stakeholders how the business performs.
• Decision-Making: Helps investors decide where to put their money.
• Accountability: Ensures managers act in owners interests.
• Compliance: Meets legal requirements (e.g., Vietnams accounting laws).
2.2 Accounting Standards
Companies use:
• GAAP (Generally Accepted Accounting Principles): U.S standard, emphasizing
con-sistency
Trang 8• IFRS (International Financial Reporting Standards): Global standard, used by
Vin-Fast and companies in Vietnam
For example, IFRS requires VinFast to report revenue from electric vehicle sales clearly,helping global investors compare it to Tesla
2.3 Key Components
Financial reports include:
• Balance Sheet: Assets, liabilities, equity.
• Income Statement: Revenue, expenses, profits.
• Cash Flow Statement: Cash inflows and outflows.
• Notes: Explanations of accounting methods (e.g., how depreciation is calculated).
2.4 Example: TechNova Software
TechNova Software, a fictional Hanoi-based startup, reports for 2024:
• Revenue: $2.5 million from app subscriptions
• Expenses: $1.8 million (development, marketing)
• Net Income: $700,000
Its IFRS-compliant report includes a balance sheet, income statement, and cash flow ment, helping investors assess its growth
state-2.5 Example: GreenLeaf Cafỗ
GreenLeaf Cafỗ, a fictional chain in Da Nang, reports:
• Revenue: $300,000 from coffee and pastries
• Expenses: $220,000 (ingredients, rent)
• Net Income: $80,000
Its financial report shows stakeholders its profitability and expansion potential
Trang 92.6 Real-World Example: VinFast
VinFasts 2024 annual report (available on its investor website) shows $1.5 billion in revenuefrom electric vehicles Its IFRS reports help investors evaluate its global expansion plans
2.7 Case Study: Linhs Loan Application
Linh, a bubble tea shop owner in Ho Chi Minh City, applies for a $50,000 bank loan Herfinancial report shows:
• Revenue: $250,000
• Net Income: $60,000
• Cash Flow: $80,000 from operations
The bank approves the loan, impressed by her steady profits and strong cash flow
1 Define GAAP and IFRS in 100 words each
2 List four components of financial reports and their purpose
3 Find VinFasts latest annual report online What is its revenue?
4 Why do banks require financial statements for loans? Write 150 words
5 Compare GAAP and IFRS based on online research
6 How does financial reporting help a startup like TechNova attract investors?
Trang 103.1 Components
• Assets: Resources owned.
– Current Assets: Cash, receivables, inventory (convertible to cash within a year) – Non-Current Assets: Property, equipment, patents.
• Liabilities: Debts owed.
– Current Liabilities: Bills or loans due within a year.
– Long-Term Liabilities: Loans due later.
• Equity: Owners investment plus retained earnings.
3.2 How to Read a Balance Sheet
Steps:
1 Check Liquidity: Do current assets cover current liabilities?
2 Assess Debt: Are liabilities manageable?
3 Evaluate Equity: Is the company well-funded by owners?
3.3 Example: TechNova Software
TechNovas balance sheet for December 31, 2024:
Liabilities
Accounts Payable $300,000Long-Term Loan $900,000Total Liabilities $1,200,000
Equity
Owners Capital $800,000Retained Earnings $350,000Total Equity $1,150,000Total Liabilities + Equity $2,350,000
Trang 113.4 Example: GreenLeaf Cafỗ
GreenLeaf Cafỗs balance sheet:
Equipment $150,000Total Assets $300,000
3.5 Real-World Example: Apple
Apples 2024 balance sheet shows $65 billion in cash and $350 billion in total assets Itsliabilities ($130 billion) are low, signaling financial strength
3.6 Case Study: Mias Investment Analysis
Mia reviews GreenLeaf Cafỗs balance sheet Its $100,000 in cash and $100,000 in liabilitiessuggest good liquidity She compares it to Highlands Coffees parent company (Jollibee),which has $1 billion in assets, to understand industry standards
3.7 Finance in Action
Minh analyzes VinFasts balance sheet and sees $2 billion in assets but $1.5 billion in bilities due to factory investments He concludes its a growth-focused company, suitable forlong-term investors
lia-3.8 Exercises
1 Categorize: cash, bank loan, inventory, accounts payable, patents
2 Verify TechNovas balance sheet equation
3 Calculate equity: $1.5 million assets, $600,000 liabilities
4 Find Apples latest balance sheet online What is its total cash?
5 Compare GreenLeaf Cafỗs and TechNovas liquidity
Trang 126 How does a balance sheet help an entrepreneur like Mia?
4 Income Statements
An income statement shows a companys profitability over a period, detailing revenue, penses, and net income Its like tracking your income from a part-time job minus yourexpenses
ex-4.1 Components
• Revenue: Money from sales or services.
• Cost of Goods Sold (COGS): Direct costs (e.g., materials).
• Gross Profit: Revenue minus COGS.
• Operating Expenses: Rent, salaries, marketing.
• Net Income: Profit after all expenses and taxes.
4.2 Analyzing an Income Statement
Ask:
• Is net income positive?
• Are expenses reasonable relative to revenue?
• Is gross profit growing year-over-year?
4.3 Example: Sunny Farms
Sunny Farms, a fictional agricultural business, reports for 2024:
Revenue $800,000
Gross Profit $450,000Operating Expenses $200,000
Net Income $200,000
Trang 134.4 Example: GreenLeaf Cafỗ
GreenLeaf Cafỗs income statement:
Revenue $300,000
Gross Profit $180,000Operating Expenses $80,000
Net Income $80,000
4.5 Real-World Example: Netflix
Netflixs 2024 income statement shows $35 billion in subscription revenue, $16 billion incontent costs, and $7 billion in net income, reflecting strong profitability
4.6 Case Study: Minhs Cost-Cutting Plan
Minh analyzes Sunny Farms income statement and notices high COGS ($350,000) Hesuggests sourcing cheaper seeds, potentially saving $50,000 annually
4.7 Finance in Action
Mia sees GreenLeaf Cafỗs $80,000 net income and compares it to Highlands Coffees $100million (Jollibees Vietnam segment) She realizes GreenLeafs profitability is strong for itssize
4.8 Exercises
1 Calculate gross profit: $1.5 million revenue, $600,000 COGS
2 Identify three expenses Sunny Farms could reduce
3 Find Netflixs latest income statement online What is its net income?
4 If revenue grows but net income falls, what might be the cause?
5 Compare GreenLeaf Cafỗs and Sunny Farms profitability
6 How does an income statement help a manager plan budgets?
5 Statement of Cash Flows
The cash flow statement tracks cash movements in three categories: operating, vesting, and financing activities It shows how cash, not just profits, keeps a businessrunning
Trang 14in-5.1 Categories
• Operating Activities: Cash from core business (e.g., sales).
• Investing Activities: Cash for assets (e.g., equipment).
• Financing Activities: Cash from loans, dividends, or stock.
5.2 Direct vs Indirect Method
• Direct: Lists cash receipts and payments.
• Indirect: Adjusts net income for non-cash items (e.g., depreciation).
5.3 Example: TechNova Software
TechNovas 2024 cash flow:
• Operating: $1,200,000 (subscriptions)
• Investing: -$600,000 (servers)
• Financing: $300,000 (loan)
• Net Cash Increase: $900,000
5.4 Example: Sunny Farms
Sunny Farms cash flow:
• Operating: $300,000 (crop sales)
• Investing: -$100,000 (tractors)
• Financing: $50,000 (loan)
• Net Cash Increase: $250,000
5.5 Real-World Example: Amazon
Amazons 2024 cash flow shows $85 billion in operating cash, funding warehouses andacquisitions, even with low net income
5.6 Case Study: GreenLeaf Cafỗs Expansion
GreenLeaf Cafỗs cash flow shows $100,000 in operating cash but -$80,000 in investingfor new equipment Mia confirms the cafỗ can fund expansion without new loans