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July 19, 2013 / maxpproductions

Understanding Financial Statements is as Easy as Eating a Pizza Pie! Part I

Financial Statements: As Easy As Eating A Pizza Pie!

Financial Statements: As Easy As Eating A Pizza Pie!

The way I see finance statements a child can understand; easy, fun, and simple!

After spending 25 years in finance and business management, I have finally been asked by a colleague: How do you explain financial statements and estimating profit to a child? I laughed out loud because I thought it would be difficult to explain to an adult let alone a child!

This article is one of a three part series that helps explain the basic concepts, in a fun easy way, of a profit and loss statement (income statement), a balance sheet and cash flow. It is geared towards children but anyone can benefit. The idea is to keep it to the basics.

I did a bit of soul searching myself since I actually did not have formal training in financial statement preparation. I learned on the job all by experience. I am a creative at heart but I also had a flair for visualizing numbers. This process goes back to when I was ten years old and a young movie fanatic. I used to look up the grosses for Hollywood movies, in the newspapers and then proceed to figure out what the producer would take home as his profit.

So let’s say the newspaper said a movie earned 500 million at the box office as an example.  I learned that the theater took approximately 30% of the gross box office. So at ten years old, I saw in my mind a Pizza pie with 10 slices. The theater owner took 3 slices which equates to 3/10 or 30%. Then I learned through reading, the distributor of the movie takes approximately 40% of the gross box office. So now that is 4 more slices of pizza out of 10 which equates to 4/10 or 40%. Add those two expenses together and you now have 7 slices out of 10 that are your expenses before you see a dollar into your bank account. So 7 slices from 10 leaves 3 slices left or 30% out of 100%. I realized at a young age numbers can seem big but broken down it is easy to understand.

I also realized huge grosses or “big numbers” doesn’t mean you will be rich. For the producer who invested 125 million and grossed 500 million at the box office, after the 7 slices taken out of the box he is left with 3 or 30%. 30% of 500 million is 150 million.  Take the 150 million and subtract his cost of making the movie and he made 25 million. Now that is a lot of money but investing 125 million and getting back 25 million is a big risk. The producer could have put that money in stocks and earned the same amount without the risk of a box office bomb. His return on investment was 20%. That is 25/125.

So for financials, don’t let the jargon scare you. Break it down into pizza slices. We all understand 3 slices out of 10 slices will fill you a little bit but you will be hungry for dinner.

Continued: Next article will be on the fundamentals of a balance sheet and what it means.

To everyone out there, get started figuring out the profit and loss statement of your favorite company by following the example given above. Let us know how you do! And when you’re done, read part II of our three part series – Balance Sheets – by clicking here.

Max P. Productions is a children’s book publisher focused on empowering children through story. The information in this article is copyright 2013 Max P. Productions. Use of this article in part or in whole must be granted by Max P. Productions. Please contact us at cs at maxpproductions dot com if you wish to use the content in this article. Thank you.

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