Business Module 5: Finance Basics

Financial Statements Overview

• Income Statement Purpose: Displays a company's revenues and expenses over a specific period, aiding in evaluating profitability.
• Components of Income Statement:
  • Revenues: Sales, interest income, etc.
  • Expenses: Cost of goods sold, operating expenses, taxes, etc.
• Key Metrics: Gross profit, operating profit, net profit, earnings per share.
• Importance: Assists investors in understanding the company's income generation capacity.

Balance Sheet Overview

• Balance Sheet Purpose: Offers a snapshot of a company's financial position at a specific moment, showcasing assets, liabilities, and shareholders' equity.
• Components of Balance Sheet:
  • Assets: Current and non-current.
  • Liabilities: Current and long-term.
  • Shareholders' equity.
• Key Metrics: Total assets, total liabilities, working capital, debt-to-equity ratio.
• Importance: Helps stakeholders assess liquidity, solvency, and overall financial health of the company.

Cash Flow Statement Overview

• Cash Flow Purpose: Illustrates how changes in balance sheet accounts and income impact cash and cash equivalents, detailing operating, investing, and financing activities.
• Components of Cash Flow Statement:
  • Operating activities.
  • Investing activities.
  • Financing activities.
• Key Metrics: Operating cash flow, free cash flow, cash flow from investing/financing activities.
• Importance: Evaluates a company's cash generation capacity and liquidity.

Investment and Financing Decisions

• Definition of Investing: Committing money or capital to endeavors expecting additional income or profit.
• Importance of Sound Financial Decisions: Essential for building wealth, achieving financial goals, and ensuring financial stability.
• Understanding Investments: Knowledge of different investment options and their characteristics.
• Factors in Financial Decision-Making: Assess risk, return expectations, and investment horizon.
• Tips for Successful Investing:
  • Do due diligence.
  • Seek advice when necessary.
  • Maintain discipline in investment strategies.

Conclusion

• Investment's Role: Critical for building wealth and achieving financial security.
• Informed Decision-Making: Align investment choices with financial goals while understanding the associated risks.