Beginner’s Guide to Understanding Financial Statements and Financial Ratios

By: Dr. Paul Borosky MBA

Narrated by: Virtual Voice

As an adjunct finance professor, since 2013 I believe, I have found that college students taking finance and accounting courses all too often struggle with understanding and analyzing financial statements and financial ratios. One reason could be the topic itself. Financial statements and financial ratios are complex topics to master, especially when classes are five to eight weeks in length. Another reason for this struggle could be that course platforms have shifted from in-person, professor-led structures to online formats where students have little guidance from faculty. In other words, it's ‘sink or swim matey.’

To make this situation worse, if that is possible, a common requirement faced by finance and accounting students is to select a public company and then analyze its income statements, balance sheets, and financial ratios for the last five years. Once done, now it's time to assess the firm’s financial health and write up a report. Simple, right? Not from my experiences.

No matter the reason, the fact remains that students, hell even investors, business owners, and financial analysts, sometimes struggle with understanding and or remembering income statement and balance sheet analysis strategies, formulas for financial ratios, or interpreting calculated financial ratios.

This leads to the purpose of the book.

The driving purpose of this book is to provide finance and accounting students, as well as business owners, investors, and financial analysts, with a basic guide and handbook steeped with tools and strategies to better understand and analyze income statements, balance sheets, and popular financial ratios.

Book Structure

For the most part, each segment of the book is designed to help you understand specific financial statement components as well as calculate and interpret common financial ratios. Further, I also provide a brief financial analysis, with a letter grade, based on a summarized version of Apple’s latest income statement and balance sheet.

Financial Statements – The income statement and balance sheet sections start with a brief explanation of each line item (revenues, COGS, cash, etc.) With this foundation set, I then define, offer analysis tips, and assess a ‘letter grade’ to the line item based on my experiences.

Financial Ratios – This section starts with showing formulas for popular financial ratios and calculated financial ratios for five years, again for the most part. Next, popular financial ratios are then defined, formulas provided, calculations for the ratios illustrated, financial analysis tips offered in most cases, and finally, a brief analysis of the ratios with an assigned ‘letter grade’ as well.

Important financial ratios defined, calculated, and analysis tips offered include the current ratio, quick ratio, total asset turnover ratio, fixed asset turnover ratio, inventory turnover, accounts receivable turnover, return on assets, return on equity, profit margin, gross profit margin, and several more.

In the end, it is my hope that you will have a better understanding of financial statements and financial ratios in general.