Crash Courses · Basic
Reading Financial Statements
Understand the P&L, Balance Sheet, and Cash Flow Statement -- what they tell you and how to spot problems.
12 min read+150 XP on completionCert: Accounting & Bookkeeping
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Reading Financial Statements
Three Core Statements
| Statement | Time Period | Answers |
|---|---|---|
| **P&L** | Period (month/year) | Is the business making money? |
| **Balance Sheet** | Point in time | What does the business own and owe? |
| **Cash Flow** | Period | Is the business generating/spending cash? |
A profitable business (positive P&L) can still run out of cash.
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P&L Structure
REVENUE $53,000
COST OF GOODS SOLD ($18,000)
GROSS PROFIT $35,000 (66% margin)
OPERATING EXPENSES ($22,100)
OPERATING INCOME $12,900
Interest Expense ($500)
NET INCOME BEFORE TAX $12,400
Income Tax (25%) ($3,100)
NET INCOME $9,300Watch: Gross margin trending down = pricing/cost problem. Operating expenses growing faster than revenue = efficiency problem.
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Balance Sheet Structure
ASSETS
Current: Cash $22k + AR $8.5k + Other $5.5k = $36,000
Non-Current: Net Equipment $11,500
TOTAL ASSETS $47,500
LIABILITIES
Current: AP $4.2k + Other $3.8k = $8,000
Long-Term: Business Loan $12,000
TOTAL LIABILITIES $20,000
EQUITY: Capital + Retained Earnings $27,500
TOTAL LIABILITIES + EQUITY $47,500 --Working Capital: $36,000 -- $8,000 = $28,000 -- (healthy)
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Red Flags to Report to Leadership
| What You See | What It Might Mean |
|---|---|
| AR growing faster than revenue | Collections are failing |
| Cash dropping while P&L shows profit | Revenue not yet collected |
| AP growing without revenue growth | Bills being deferred |
| Negative working capital | Short-term cash crisis risk |
| Unusual new liability | Unknown loan or obligation |
Reading progress
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In this module
Profit & Loss Statement (P&L)
Gross Profit
Net Income
Balance Sheet
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