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Report Analysis – How to Read the Statements

Learning toReports read and analyze financial statements is crucial to the success of the business.  If the owner can decipher the information and make good decisions, the company will improve. But to make good decisions, the owner has to be able to understand what they are reading. This section teaches the business owner how to read the financial statements.

These articles are in-depth and are educational in nature.  If you are looking for some quick lesson, this isn’t the site for you.  It took me seven years of education and 17 years on the job to develop the necessary skills to truly understand financial statements.  I can’t teach you nor anyone in 10 minutes or less.  I’ve kept the information simple and easy to understand.  If you have questions, contact me via the ‘My Services’ page in the footer below.

FEATURE ARTICLES:

  • Depreciation – This is Weird Accounting

    In the world of accounting, there are two types of expenses on the reports widely misunderstood.  They are depreciation and amortization.  I will try to help the novice gain an understanding of depreciation in this article.  So if you can, clear your mind and let us begin: In business we buy all types of goods to get ...
  • How to Read a Balance Sheet – Simple Format

    AssetsReading a balance sheet is instrumental in understanding the business’s financial position.  This particular financial report is a snapshot of a moment in time.  It can change dramatically in a minute so understanding the perspective of the report and its respective sections will help you to be better informed. So what is a balance sheet?  It ...
  • The True Cost of Labor

    I laugh at the definition of labor costs because in my opinion the so called experts only have it half right.  Labor costs are more than just gross wages and benefits.  It should include the costs of insurance, employer taxation, human resources management and incentives.  All of the costs associated with delivering the human element ...
  • What is Amortization?

    There are three methods of expensing an asset to the income statement.  The most common method is depreciation for fixed assets.  Mining, oil, and natural resource operations use depletion (amount removed versus the estimated volume on hand).  Non-physical assets are expensed to the income statement or profit and loss statement via a method called amortization.  It ...
  • How to Read a Balance Sheet – Equity Section (Simple Format)

    The equity section of the balance sheet equals assets minus liabilities.  Traditionally the equity section is referred to as the net worth of the company.  If you were to dispose of all the assets through a sale and pay off liabilities, the money left over would be available for distribution to the shareholders.  The shareholders ...
  • The Various Forms of Depreciation

    depreciation definitionThere are various forms of depreciation used in the small business world.  In general, depreciation is not required but it is advisable.  So a small business owner should understand depreciation and the various forms of how to calculate the deduction.  Once you understand the reasoning behind depreciation you can better comprehend the different methods and ...
  • An Explanation of Current Assets

    The asset side of the balance sheet is divided into 3 major sections.  They include current assets, fixed assets, and other assets.  Current assets carry the most value to the small business entrepreneur because of the cash conversion aspect.  Cash is the blood that keeps a business alive.  So what are current assets?  How do ...
  • Accrued Payroll – An Explanation

    Accrued payroll is a current liability comprised of four sections.  The first is the amount of payroll earned by staff and not yet processed or paid.  The second is the dollar value of personal time off accumulated for each employee aggregated into one number.  The third consists of payroll taxes owed to the respective governmental ...
  • The Fixed Assets Section of the Balance Sheet

    The fixed assets section of the balance sheet is one of the easiest sections to read and understand.  This article is written to describe and illustrate some simple examples of the fixed assets section.  I am not teaching the reader about the accounting system(s) used for fixed assets or how to calculate depreciation.  This article ...
  • Current Liabilities Section of the Balance Sheet

    The current liabilities section of the balance sheet identifies those amounts due to third parties within the current year.  These include accounts payable, credit card accounts, accrued payroll, taxes, unearned revenue, deposits and those amounts due within one year related to debt instruments.  In general they are listed from the most immediate amounts due to ...
  • Accelerated Depreciation – An Explanation

    When it comes to depreciation, no two businesses are alike. Unlike traditional straight line depreciation where the asset value is cost out to depreciation expense in equal increments over a given life expectancy, accelerated depreciation expenses the cost at higher values during the earlier accounting periods and at a lower amount towards the last half ...
  • Quick Ratio – Definition, Explanation and Proper Use

    The quick ratio is a formula used in business to identify the ability of a business to pay its current liabilities.  It is also known as the ‘Acid Test’ formula (ratio).  In the large markets this formula is one of the financial industry ratios used to value the stock of a corporation.  In the arena ...
  • Dividends and Distributions –Use in the Proper Context

    Dividends and distributions refer to the payment of cash to investors.  So why two separate terms?  Well, the term is tied back to the type of entity that makes the payment.  Simply stated, regular corporations, i.e. C-Corporations as identified in the Internal Revenue Code use the term ‘Dividends’ and S-Corporations (Small Business Corporations) use the ...
  • Trial Balance – Purpose and Interpretation

    Debits and CreditsThe trial balance is an accountant’s report used to identify issues with the respective ledger accounts.  In general, the trial balance sums all the debits and credits in the footer section and the accountant verifies that the total debits equal total credits.  This confirms proper entry in the dual entry accounting system.  Once the debits ...
  • Returns, Allowances and Discounts in Accounting

    In the revenue section of every income statement (profit and loss statement) is an adjustment group to sales.  This group reflects the value related to the actual sale of the product or services.  This adjusting group is comprised of three significant types of adjustments to sales.  The first are returns, items returned to the store ...
  • Long Term Debt – Financial Statement Presentation

    Long Term Debt is one of the multiple forms of capitalizing a business.  It includes bonds, secured notes and mortgage notes.  In the world of small business, the most common form of long term debt is secured notes, most likely with recourse.  As an owner of a business you need to understand how this information ...
  • Retained Earnings – How it Works

    In the equity section of the balance sheet there is an account that tallies the lifetime earnings net of dividends for the company.  The value identifies the total amount retained by the company for operational purposes.  This account is referred to as the Retained Earnings of the business.   For the average business owner understanding this account ...
  • Financial Statements for the Small Business

    Financial statements serve the purpose of presenting economic activity and status related to a particular date and over a particular time frame.  Accountants record monetary transactions and via financial reports present the information in an easy to understand format.  The financial statements for a small business do not have to comply with those of publically ...
  • Profit and Loss Statement Using Class Accounting

    Class accounting breaks down sales and the associated cost of sales into functional groups.  Whether you use divisions or departments or product/service lines class accounting allows you to identify those more profitable areas of operations.  This is just one of the many different financial reports used in small business. To help you envision class accounting I’m going ...
  • Fixed Assets To Debt Relationship

    Every business owner, especially young entrepreneurs, must understand how long-term debt  is used to finance the purchase of fixed assets . It is a basic principle especially for start-ups. There is a relationship that exists between the two. If created correctly, profitability is enhanced and cash flow is maximized. But most business owners lack the knowledge about ...
  • Inventory Turnover Rate

    One of the many ratios used in business, the inventory turnover rate is often misunderstood, miscalculated and misused.  The traditional business course in academia explains that ideally the inventory turnover ratio (rate) is the highest number possible.  This higher value means the business operation is selling the product as fast as possible.  This in turn ...
  • Accounts Payable Turnover Rate (Ratio)

    The accounts payable turnover rate is a business activity ratio measuring the frequency of the company’s ability to pay its vendors and suppliers.  The numerical value is customarily reported as an annual value.  The higher the number, the more often the payables are cleared (paid).  A ’12’ would indicate that all payables are paid every month ...
  • Return on Assets

    One of the performance ratios used in business identifies the overall ability of management to efficiently utilize resources to generate a profit.   Corporate resources include human knowledge/skills and the balance sheet assets of the business.   The labor component is unquantifiable in terms of dollars, but assets with a dollar value associated with them are reflected ...
  • Net Profit Margin

    The net profit margin reflects the profitability of the company as a percentage of net sales.   It is one of the performance ratios used in evaluating business.   Interestingly, some consider it the most important ratio.   These users of business ratios take a very simplistic approach towards business evaluation.   If the net profit margin is a ...
  • Debt to Equity Ratio

    Another leverage ratio used to evaluate the financial integrity of a business is the debt to equity ratio.   It is strictly a bottom half balance sheet ratio.   Its result explains the relationship of volume of debt and corresponding equity to finance the operations of a business, i.e. the purchase of assets.   What is important to understand ...
  • Gross Profit Margin

    The difference between the sales price and the cost of the product or service rendered is known as gross profit margin in business.  It is traditionally the amount identified on the income statement or a tax return as the amount earned after cost of sales a.k.a cost of goods sold, cost of services rendered, etc. ...
  • Interest Coverage Ratio

    The last of the leverage ratios isn’t really a pure leverage indicator but augments the debt ratio.  Debt requires the payment of interest and so an indicator of the ability to pay this interest is needed.  This is the interest coverage ratio.  It basically identifies how many times earnings can pay the interest required by existing debt.  The ...
  • Business Ratios (Introduction)

    How does a business investor compare a small railroad line serving only a few states to a large railroad like Union Pacific? Answer: Ratios! Ratios are used in business to compare companies of different sizes within the same industry. The goal is to discover the best investment for return on your stock purchase.  Business ratios essentially equalize ...
  • Current Ratio

    The current ratio is an inappropriate relationship to use or rely on in small business.   The ratio is best suited for large publicly traded organizations.   This article explains the basic formula for the current ratio, how to identify the ratio in reading financial statements, its purpose and the many drawbacks for its use ...