Financial Statements

Abstract

A high-level understanding of accounting is required by most engineers and scientists within a company in order to communicate with the company’s managers and accounting staff. Knowledge of the concepts and principles is also necessary in order to determine the relationship between the free cash flows for a project, and the effect that these will have on the financial statements of the company. The objective of this chapter is to develop such an understanding. The business process, in which a company invests in productive capability, makes a profit and reinvests part of this profit in the business for more productive capability, is discussed. It is shown how the principles of accounting and the recognition of the dual nature of transactions means that these activities can be reported in terms of the financial statements, that is, the income statement and the balance sheet. The analysis of the financial statements in terms of ratio analysis and the Du Pont diagram is examined. Two detailed case studies are presented. The first shows how the cash flows for a project, which were discussed in Chapter 1, are reported as financial statements. The second focuses on business risk. The effect of the interest paid on loans and the credit terms offered to customers on the profitability of the business are examined in this case study.