Question

Is it important for non-accountants to understand how to read financial statements? If you are not part of the accounting/finance function in a business what difference would it make?

Answer 1

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Reading Financial statements can provide better financial decisions personal Finance and in business Finance.

It is important for non-accountants to understand how to read financial statements in a basic manner. It helps them to provide BETTER funding decisions, investment decisions when they wish to invest in a business.

Not being part of the accounting/Financiaing part can make a significant difference in the way a person understands financial statements. It also becomes less important for a person to have knowledge of the same.

Mainly the Business Accounting and Financing function demand the knowledge to understand financial statements.

A person in Accounting/Finance function can better link the various financial statements.

The income statement, balance sheet and cash flow statement are financial statements prepared by a company.

They help us interpret the financial position of the company.

Investors use financial statements to make financial decisions about the company by knowing the status of its operations.

Income statement let us the revenue and expenses for the period. It's the NET result is net income.

The net income from the income statement is transferred to the balance sheet under shareholders funds. Under shareholders funds, it is kept under reserves and surplus. Reserves and surplus accumulate from time to time as and when net income is transferred from the income statement to balance sheet.

The balance sheet tells us the status of assets and liabilities for a particular date.

Any unaccrued income or expenses is transferred from balance sheet to income statement, during the period when they accrue. Unaccrued expenses such as rent paid in advance is an asset in the balance sheet. It is shown under expenses during next year.

So one component of the Balance sheet is linked to another component of Income statement in such away.

Cash flow statement shows the cash flow from operating, financing and investing activities.

Cash flow from financing and investing activities are taken from the balance sheet.

Cash flow from operating activities is taken from the income statement.

All the 3 financial statements are interlinked and work together to provide insightful information about the company.

If a person is not part of the accounting/finance function in a business- the person will not be able to appreciate the interlinkage.