Topic 1.6.1 Basic Understanding of Financial Statements

Basic Understanding of Financial Statements

Discussion: What do you know about financial statements? Have you ever seen a financial statement before? Share your experiences or what you’ve heard about terms like “profit,” “expenses,” or “revenue.”

Basic Theory for Understanding Financial Statements (B1 Level)

1. What are Financial Statements?

Financial statements are documents that show how a company is doing financially. They help people see if a company is making money, spending too much, or if it is in good financial health. There are three main financial statements:

  1. Income Statement: Shows how much money a company earns (revenue) and spends (expenses) over time.
  2. Balance Sheet: Shows what the company owns (assets) and owes (liabilities) at a specific point in time.
  3. Cash Flow Statement: Shows how money moves in and out of the company.

2. Important Words and Phrases

Income Statement (Profit and Loss Statement)

  • Revenue: Money a company earns from selling products or services.

    • Example: “Our revenue increased by 10% this year.”

  • Expenses: Money a company spends to run its business (rent, salaries, etc.).

    • Example: “We need to lower our expenses to make more profit.”

  • Profit: Money left after all expenses are subtracted from revenue.

    • Example: “The company made a profit of $30,000.”

  • Loss: When expenses are greater than revenue.

    • Example: “The company suffered a loss last month.”

Balance Sheet

  • Assets: What the company owns (cash, property, equipment).

    • Example: “The company’s assets include offices and vehicles.”

  • Liabilities: What the company owes (loans, bills).

    • Example: “We need to pay off our liabilities by next year.”

  • Equity: The value of what the owners of the company have, after subtracting liabilities from assets.

    • Example: “The company’s equity has grown over the past year.”

Cash Flow Statement

  • Cash Inflow: Money coming into the company (from sales, investments).

    • Example: “Cash inflow increased because of higher sales.”

  • Cash Outflow: Money going out of the company (expenses, loan payments).

    • Example: “Our cash outflow went up due to new equipment purchases.”

3. Simple Phrases for Talking About Financial Performance

  • Good Performance:

    • “The company is doing well financially.”
    • “We made a good profit this quarter.”
    • “Our revenue has gone up.”

  • Bad Performance:

    • “The company had a loss this year.”
    • “Our expenses are too high.”
    • “We need to manage our cash flow better.”

4. Talking About Changes in Financial Performance

Use these words when talking about changes in the company’s financials:

  • Increase: “Revenue increased by 5%.”
  • Decrease: “Expenses decreased compared to last month.”
  • Remain stable: “Our cash flow remained stable.”
  • Rise: “There was a rise in profit this quarter.”
  • Fall: “Our revenue fell due to lower sales.”

5. Simple Questions and Answers

  • Questions:

    • “Why did our expenses increase?”
    • “What caused the rise in profit?”
    • “How can we improve our cash flow?”

  • Answers:

    • “Expenses increased due to higher wages.”
    • “The rise in profit is from higher sales.”
    • “We can improve cash flow by cutting unnecessary costs.”

6. Cultural Tip

In the UK and US, some financial words are different:

  • UK: Turnover (Revenue), Debtors (People who owe you money), Creditors (People you owe money).
  • US: Revenue, Accounts Receivable, Accounts Payable.

Understanding key words like revenue, expenses, profit, assets, and liabilities helps you talk about a company’s financial health. With this vocabulary, you can easily discuss how well a company is doing financially and what changes need to be made.

Reading Comprehension Activity: Understanding Financial Statements

Instructions: Look at the simplified Income Statement and Balance Sheet below. After reading, answer the questions based on the information provided.

Simplified Income Statement for ABC Company (for the year ending December 31, 2023)

Item

Amount

Revenue

$500,000

Cost of Goods Sold (COGS)

$300,000

Gross Profit

$200,000

Operating Expenses

$120,000

Operating Profit

$80,000

Taxes

$20,000

Net Profit

$60,000

Simplified Balance Sheet for ABC Company (as of December 31, 2023)

Item

Amount

Assets

 

Cash

$50,000

Accounts Receivable

$30,000

Equipment

$200,000

Total Assets

$280,000

Liabilities

 

Loans

$100,000

Accounts Payable

$20,000

Total Liabilities

$120,000

Equity

$160,000

Questions

  1. What is the company’s total revenue?
  2. What is the company’s net profit?
  3. What are the company’s total assets?
  4. How much are the company’s total liabilities?
  5. How much is the company’s equity?
  6. What is the company’s gross profit?
  7. What are the company’s operating expenses?
  8. How much does the company owe in loans?

Group Discussion Activity: Improving Financial Performance

Instructions: Work in small groups to discuss how to improve a company’s financial situation. Consider the scenario below and use the financial vocabulary you’ve learned (revenue, expenses, profit, liabilities, assets, etc.) to come up with potential solutions. Be prepared to share your ideas with the class after the discussion.

Scenario:

Your company, XYZ Corp., has high revenue, but its profit is very low. The company is making a lot of money from sales, but at the end of the year, there isn’t much profit left. The management is concerned and wants to improve the company’s profitability.

Discussion Points:

  1. What could be causing the low profit?
    (Think about possible reasons like high expenses, unnecessary costs, inefficient operations, etc.)
  2. What steps can the company take to improve profit?
    (Consider strategies such as reducing expenses, increasing efficiency, or negotiating better terms with suppliers.)
  3. How can the company maintain high revenue while increasing profit?
    (Discuss ways to keep sales high but manage costs more effectively.)

Key Vocabulary to Use:

  • Revenue
  • Expenses
  • Profit
  • Cost of Goods Sold (COGS)
  • Operating expenses
  • Liabilities
  • Assets
  • Cash flow

Examples of Discussion Points:

  • Reducing Operating Expenses: “We could reduce expenses by cutting unnecessary costs, like travel or office supplies.”
  • Improving Efficiency: “Maybe we can improve efficiency by automating some processes to reduce labor costs.”
  • Negotiating with Suppliers: “If we negotiate better deals with suppliers, we can lower our cost of goods sold (COGS), which would improve profit margins.”
  • Streamlining Operations: “We might have too many employees or need to restructure departments to save on salaries.”

After the discussion, each group will present their ideas on how to improve the company’s profitability.

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