Whether you want to grow a company or invest in one, understanding financial statements is instrumental. Professor Thomas Porter gathered with students to discuss the basics of Generally Accepted Accounting Principles that all entrepreneurs and investors need to know.
Thomas Porter, visiting professor of business administration at Tuck School of Business, spoke with students last week about the basics of business accounting.
“I’m impressed that a bunch of college students are willing to listen to a presentation about accounting on a Sunday afternoon,” Porter told the attendees. “That gets me excited.”
The event, which is available to watch here, was organized by DartUp, a program of the Magnuson Center that encourages students to start their own endeavors by exposing them to diverse opportunities and skill sets in the entrepreneurial space.
Elizabeth Frey D’24, vice-chair of DartUp, explained that understanding financial statements is critical for anyone with an interest in founding a company.
“Whenever you’re making a startup, you’re going to be looking at companies that have succeeded,” Frey said during the event. To do that, you must be able to understand and interpret financial statements, something that many students on the call felt overwhelmed by.
“It doesn’t have to be as intimidating as it looks,” Porter said.
Generally Accepted Accounting Principles
The event centered on explaining Generally Accepted Accounting Principles (GAAP). All stakeholders in a company — from owners and investors to customers, suppliers, and even the government — want to know about the financial standing of an endeavor. If leadership spent time constantly answering questions from stakeholders, they would have no time to run the company, Porter said. To solve that issue, GAAP evolved as the standard for delivering financial information to stakeholders. In order for GAAP to be effective, stakeholders must be able to digest the information they have access to.
“It’s incumbent on stakeholders to understand reports,” Porter said. “That’s what learning accounting is all about: what are these reports that companies produce and how do we find out what we need to know from these reports? It’s like speaking another language.”
GAAP is built around pillars, including:
The Balance Sheet
To understand the balance sheet, you must know three terms: assets (what a firm owns), liabilities (what a firm owes) and equity (the amount that owners own). The balance sheet is a snapshot of a single moment, showing the company’s assets, which are calculated by adding liabilities and equity.
Also known as a profit and loss statement or statement of operations, the income statement is more like a movie than a photo, Porter said. The income sheet will reflect the net income of a firm, but subtracting expenses from revenue over a period of time.
Statement of Cash Flow
The statement of cash flow is a snapshot showing a firm’s cash flow in three categories: how much is allocated to revenue-producing activities; how much is invested in assets; and how much is associated with borrowing and stakeholder stock.
Resources for Additional Information
During the event, Porter walked students through actual financial documents from Conagra, which owns brands including Duncan Hynes, Healthy Choice and Slim Jim. He also invited any students who wanted more information to get in touch by visiting his office (Chase 203) on Wednesdays.
“I’m there most of the day, so if you’ve got nothing better to do or want to learn more about accounting, please stop by and visit,” he said.
For more information on reading financial statements, Porter recommends the guides published by brokerage houses that detail how to interpret GAAP. The SEC also has a beginners’ guide to financial statements.
The book “Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports,” by Howard Schilit, outlines great examples of how companies attempt to manipulate their financial statements, he added.
Although financial statements have a barrier to entry, Porter recommended that future entrepreneurs jump right in. Understanding GAAP will help you gain knowledge about your company and relay that information to potential investors.
“No matter what you’re doing, you’re going to need to get capital from somebody, and they’re going to look for financial statements,” he said.
Watch Professor Porter’s presentation here.