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Elephants are a symbol of wisdom in Asian cultures and are famed for their memory and intelligence.
Aristotle once said the elephant was “the beast which passeth all others in wit and mind.”
John Godfrey Saxe’s (1816-1887) version of the famous Indian legend of the Blind Men and the Elephant provides an insight and perspective into Financial Statements that is often overlooked to the detriment of businesses.
THE BLIND MEN & THE ELEPHANT
It was six men of Indostan, To learning much inclined, Who went to see the Elephant, (Though all of them were blind.) That each by observation, Might satisfy his mind.
The FIRST approached the Elephant, And happening to fall, Against his broad and sturdy side, At once began to bawl; “God bless me! But the Elephant, Is very like a wall!”
The SECOND, feeling of the tusk, Cried, “Ho! What have we here, So very round and smooth and sharp? To me ‘tis very clear, This wonder of an Elephant, Is very like a spear!”
The THIRD approached the animal, And happening to take, The squirming trunk within his hands, Thus boldly up and spake: “I see,” quoth he, “the Elephant, Is very like a snake!”
The FOURTH reached out his eager hand, And felt about the knee, “What most this wondrous beast is like, Is mighty plain,” quoth he, “Tis clear enough the Elephant, Is very like a tree!”
The FIFTH, who chanced to touch the ear, Said: “E’en the blindest man, Can tell what this resembles most; Deny the fact who can, This marvel of an Elephant, Is very like a fan!”
The SIXTH no sooner had begun, About the beast to grope, Then, seizing of the swinging tail, That fell within his scope, “I see,” quoth he, “the Elephant, Is very like a rope!”
And so these men of Indostan, Disputed loud and long, Each in his own opinion, Exceeding stiff and strong, Though each was partly in the right, And all were in the wrong!
MORAL
So oft in theologic wars, The disputants, I ween, Rail on in utter ignorance, Of what each other means, And prate about an Elephant, Not one of them has seen!
FINANCIAL STATEMENTS are like the Blind Men and the Elephant. Each Financial Statement provides a different perspective on the company and its operations. Taken separately, they can yield a false impression which leads to poor decisions. When they are all put together, however, they display a clear and accurate picture of the organization.
FINANCIAL
STATEMENTS
What do elephants and Financial Statements have in common?
A QUESTION TO CONSIDER...
A COMPLETE SET OF FINANCIAL STATEMENTS
The five (5) Financial Statements that comprise a complete set of financials, and the unique perspective each renders to the overall picture of the company, are as follows:
1)THE BALANCE SHEET…The Balance Sheet is a Statement of the company’s financial condition as of a specific date. It details the organization’s Assets, Liabilities and the Equity of its owners. In essence it shows you What a company owns and owes on a particular day; and, if there is anything left over for the owners.
THE BALANCE SHEET…The Balance Sheet is a Statement of the company’s financial condition as of a specific date. It details the organization’s Assets, Liabilities and the Equity of its owners. In essence it shows you What a company owns and owes on a particular day; and, if there is anything left over for the owners.2)THE INCOME STATEMENT…The Income Statement has many other names. It can be called the Operating Statement, the Statement of Operations, the Profit and Loss Statement or simply the P & L. The Income Statement is a summary of income or revenue over a specific period of time. It will also show the costs and expenses directly associated with producing that revenue. The Income Statement lets you know if you are charging correctly for the goods or services you provide and whether you are making a profit or experiencing a loss.
THE INCOME STATEMENT…The Income Statement has many other names. It can be called the Operating Statement, the Statement of Operations, the Profit and Loss Statement or simply the P & L. The Income Statement is a summary of income or revenue over a specific period of time. It will also show the costs and expenses directly associated with producing that revenue. The Income Statement lets you know if you are charging correctly for the goods or services you provide and whether you are making a profit or experiencing a loss.3)THE CASH FLOW STATEMENT…The Cash Flow Statement provides insight into where your cash actually came from and where it went over a given period of time. It examines the company’s inflow and outflow of cash in three (3) areas: Operations, Investments and Financing. You cannot spend Profit. You can only spend cash. Spending Profit is like writing personal checks simply because you have checks left in the checkbook. THE RESULT COULD BE REAL TROUBLE! PROFIT IS NOT CASH! The Cash Flow Statement lets you know how much cash you can spend and if you are living within your means.
THE CASH FLOW STATEMENT…The Cash Flow Statement provides insight into where your cash actually came from and where it went over a given period of time. It examines the company’s inflow and outflow of cash in three (3) areas: Operations, Investments and Financing. You cannot spend Profit. You can only spend cash. Spending Profit is like writing personal checks simply because you have checks left in the checkbook. THE RESULT COULD BE REAL TROUBLE! PROFIT IS NOT CASH! The Cash Flow Statement lets you know how much cash you can spend and if you are living within your means.4)RETAINED EARNINGS…Retained Earnings shows how much of a company’s Profit was paid out to ownership and how much was kept by the company to conduct day to day operations and provide for the future. Retained Earnings is a cumulative total that dates back to the first day the company opened its doors to do business. It is a ‘Stand Alone Number’ differentiating how Profit was dispersed.
RETAINED EARNINGS…Retained Earnings shows how much of a company’s Profit was paid out to ownership and how much was kept by the company to conduct day to day operations and provide for the future. Retained Earnings is a cumulative total that dates back to the first day the company opened its doors to do business. It is a ‘Stand Alone Number’ differentiating how Profit was dispersed.5)FOOTNOTES…Footnotes is a written narrative explaining where the numbers came from in the other Financial Statements. Today, Footnotes are so crucial they are considered to be a separate Financial Statement. They explain how the numbers were obtained and address any possible areas of confusion or contention.
FOOTNOTES…Footnotes is a written narrative explaining where the numbers came from in the other Financial Statements. Today, Footnotes are so crucial they are considered to be a separate Financial Statement. They explain how the numbers were obtained and address any possible areas of confusion or contention.FINANCIAL STATEMENT FORMAT & KEY CONSIDERATIONS
The following illustrations depict how the three major Financial Statements are formatted, constructed and arranged.
Also included is a Key Consideration List for each Financial Statement showing the information on each that is vital to understanding the overall picture of the company.
Finally, a Comparison Chart is provided which can be used as a Reference Tool to remind you of the important concepts to remember on each Financial Statement.
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PLEASE SELECT EACH STATEMENT BELOW TO VIEW THE CORRESPONDING ILLUSTRATIONS
THE BALANCE SHEET
THE INCOME STATEMENT
THE CASH FLOW STATEMENT
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Financial Statements
COMPARISON CHART
