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One Man's View » Financial Statements http://onemansview.us Have you had enough of the insanity in Government? Sat, 01 Sep 2012 21:28:06 +0000 en-US hourly 1 http://wordpress.org/?v=3.4.2 The State of Our Government – Part 4 http://onemansview.us/government/economy/the-state-of-our-government-part-4/ http://onemansview.us/government/economy/the-state-of-our-government-part-4/#comments Fri, 26 Mar 2010 21:10:52 +0000 Blogger http://onemansview.us/?p=397

In the first article of this series I made mention of the need for Government to be run more like a business.  I’m going to expand that discussion here.  I meant to get to this sooner, but I kind of went out in the weeds over the Health Care debacle.

In order for what I’m about to say to make sense to those without financial backgrounds, a brief lesson in financial accounting is necessary.  This is the stuff you’d learn in Basic Financial Accounting 101 in college.  If you already have this background, you can skip down to the more detailed discussion.

There are two (2) basic financial statements:  The Balance Sheet and the Income Statement, also known as the Profit & Loss or P&L.  We’ll discuss the Balance Sheet first.

Balance Sheet

In creating a balance sheet, there is one simple equation:  Assets = Liabilities + Equity.

Assets are typically broken down into Cash, Receivables (short and long term), physical items such as inventory and property, and investments.  These aren’t all, but they’ll work for this discussion.

Liabilities can generally be considered as Debt (short and long term) in one form or another.

Equity is what’s left over when you subtract Liabilities from Assets.

Using your home as an example, is it’s worth $200,000 (Asset Value) and you owe $100,000 (Liability), you have $100,000 in Equity.

Income Statement

The Income Statement’s equation is simply Revenue – Expenses = Profit.

The Balance Sheet and Income Statements are generally used to determine a company’s or individual’s financial health.  Almost every time you complete a credit application, you’re required to provide this information in terms of your monthly income and expenses, plus list what your assets are, and how much, if anything, you owe on them.  Some of this information is used to determine your FICO Score, but that’s another topic.

There are a number of ratios used to determine a firm’s performance and financial situation.  The ones we’re most concerned with are:

  • Current Ratio:  Current Assets divided by Current Liabilities (provides information about a firm’s ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm)
  • Debt Ratio:  Total Debt divided by Total Assets (provides an indication of the long-term solvency of the firm)
  • Debt-to-Equity Ratio:  Total Debt divided by Total Equity (provides an indication of the long-term solvency of the firm)
  • Return on Equity:  Net Income divided by Shareholder Equity (i.e.,  the bottom line measure for the shareholders, measuring the profits earned for each dollar invested in the firm’s stock)

We’ll apply these to our nation’s current financial statements later, so you can see how we’re doing.  When interpreting the Financials, remember, YOU are the shareholder… the investor in the business.  You buy company stock every time you pay a tax on anything to the Federal Government.  Congress is the Board of Directors.  The Cabinet and President are the Corporate Officers.  The Board makes policy and the Officers carry out the policy (ignoring for the moment the President’s Veto power).

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