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1. BSBFIA412 Report on financial activity
Session 3
© 2009 Innovation & Business Industry Skills Council Ltd

2. Introduction
 In this session we will discuss how to read and
interpret financial statements.
 The session objectives are as follows:
 read and interpret a balance sheet
 read and interpret a profit and loss statement
 read and interpret an operating budget
 identify discrepancies, unusual features or queries;
appropriately address those issues
 use of conversion and consolidation methods to
complete analysis.
© 2009 Innovation & Business Industry Skills Council Ltd

3. The balance sheet
 Reports an organisation’s current financial position with
regards to assets, liabilities and owner’s equity.
 The values are as at the date detailed on the balance sheet.
 Reports assets in two ways:
 Owner’s equity – the sum of the accumulated funds brought
forward from the previous financial year and the profit/loss
for the year to date – this is shown at the top of the balance
sheet.
 Net Assets – a detailed list of each account and the value for
each account.
 Owner’s equity equals net assets. Therefore net assets are
often referred to as owner’s equity.
© 2009 Innovation & Business Industry Skills Council Ltd

4. Profit and loss statement
 A profit and loss statement is also sometimes called
the income statement.
 Represents the organisation’s income and expenses for
a period of time, for example, a month or a year.
 Reports the company’s profit/loss as at the date the
statement is completed by subtracting the sum of the
expenses from the sum of the income.
© 2009 Innovation & Business Industry Skills Council Ltd

5. Operating budget
 Completed at the beginning of a financial year.
 Details what income and expense transactions an
organisation expects to have over the coming year.
 Typically broken down by month.
 Used as a analysis tool when monitoring the actual
performance of the organisation.
 Used to understand if the organisation is on track to
achieve its yearly financial performance goals.
 Adjustments are sometimes made to the budget to
keep it aligned to the organisation’s business plan.
© 2009 Innovation & Business Industry Skills Council Ltd

6. Identifying discrepancies,
unusual features or queries
 Finance managers are responsible for analysing
financial statements and identifying issues.
 Management teams rely on finance managers to
identify issues and bring them to their attention.
 The most common issues are:
 large variances in budgeted versus actual amounts.
 high or low expenditure.
© 2009 Innovation & Business Industry Skills Council Ltd

7. Analysing financial statements
 Finance Managers are responsible for completing
analysis of financial statements to ensure that
organisations have a good understanding of their
financial position.
 The following are methods for analysing financial
statements.
 trend analysis
 calculating averages and variances
 determining unit costs.
© 2009 Innovation & Business Industry Skills Council Ltd

8. Summary
You should now understand:
 How to read and interpret the following financial
statements:
 balance sheet
 profit and loss statement
 operating budget.
 How to identify discrepancies, unusual features or
queries and appropriately address those issues.
 How to use conversion and consolidation methods to
complete analysis.
© 2009 Innovation & Business Industry Skills Council Ltd