Session 1: Financial Statements - The Language of Business

Session 1: Financial Statements - The Language of Business#

Learning to read the story that every company tells.

Section 1: The Financial Hook - The $50 Million Mystery#

In 2019, a young analyst at a hedge fund noticed something odd. WeWork, the hottest startup in Silicon Valley, was valued at $47 billion. SoftBank had just invested billions more. Everyone was talking about the “future of work.”

But when she actually read WeWork’s financial statements (filed for their planned IPO), she discovered:

Revenues: $1.8 billion
Losses: $1.9 billion
Cash burn: $2.2 billion per year

Within weeks, the IPO was pulled. The valuation collapsed to $8 billion. The CEO resigned. Thousands lost their jobs.

The difference between hype and reality? The ability to read financial statements.

What You’ll Discover Today:

The Three Windows Into Any Business:
📊 Income Statement -----> "Are we making money?"
📊 Balance Sheet --------> "What do we own and owe?"
📊 Cash Flow Statement --> "Where's the actual cash?"

Master these three documents, and you'll see through
any company's story to the truth underneath.

This isn’t about becoming an accountant. It’s about developing X-ray vision for business.

Section 1.5: Self-Test Quiz - Check Your Starting Point#

Instructions: Choose the best answer for each question. Don’t use AI - this is to check what you already know.

Question 1: Which financial statement would tell you if a company is profitable?

a) Balance Sheet
b) Income Statement
c) Cash Flow Statement
d) All of them equally

Question 2: If a company says “We have $1 billion in assets,” where would you verify this?

a) Income Statement
b) Balance Sheet
c) Cash Flow Statement
d) CEO’s Twitter

Question 3: A company can be profitable but still go bankrupt. Which statement best explains why?

a) Income Statement
b) Balance Sheet
c) Cash Flow Statement
d) None of these

Question 4: Revenue is the same as:

a) Profit
b) Cash
c) Sales
d) Assets

Answers: 1-b, 2-b, 3-c, 4-c

Section 2: Foundational Financial Concepts & Models#

Part I: The Business Storytelling System#

Think of financial statements as a company’s vital signs—like a doctor checking pulse, blood pressure, and temperature. Each statement answers a critical question:

The Three Core Financial Statements:

Income Statement (also called P&L - Profit & Loss)
- The Performance Story: “How well did we do?”
- Time period: Usually a quarter or year
- Shows: Revenue → Expenses → Profit (or Loss)
- Like: Your monthly credit card statement
Balance Sheet (also called Statement of Financial Position)
- The Snapshot Story: “What’s our situation right now?”
- Point in time: Specific date
- Shows: Assets = Liabilities + Equity
- Like: Your net worth statement
Cash Flow Statement
- The Movement Story: “How did cash actually move?”
- Time period: Usually matches Income Statement
- Shows: Cash from Operations + Investing + Financing
- Like: Your bank account activity

Part II: The Income Statement - Keeping Score#

The Basic Flow:

Revenue (Money from customers)
  ↓
- Cost of Goods Sold (Direct costs)
  ↓
= Gross Profit (What's left after direct costs)
  ↓
- Operating Expenses (Overhead: rent, salaries, etc.)
  ↓
= Operating Income (Profit from core business)
  ↓
- Interest & Taxes
  ↓
= Net Income (The "bottom line")

Real Example - Coffee Shop:

Sell 100 coffees at $5 each = $500 Revenue
Coffee beans, cups, milk = $150 COGS
Gross Profit = $350 (70% margin - not bad!)
Rent, wages, utilities = $200 Operating Expenses
Operating Income = $150
Interest on loan = $20, Taxes = $30
Net Income = $100 (20% net margin)

Part III: The Balance Sheet - What You Have vs. What You Owe#

The Universal Equation: $$\text{Assets} = \text{Liabilities} + \text{Equity}$$

Or in plain English: $$\text{What You Have} = \text{What You Owe} + \text{What's Left for Owners}$$

Think of it like buying a house:

House value (Asset): $500,000
Mortgage (Liability): $400,000
Your equity: $100,000

Business Example:

ASSETS (What we own)          LIABILITIES (What we owe)
Cash: \$50,000                  Accounts Payable: \$30,000
Inventory: \$100,000            Bank Loan: \$200,000
Equipment: \$200,000            Total Liabilities: \$230,000
Building: \$500,000             
                               EQUITY (Owners' stake)
                               Stock: \$100,000
                               Retained Earnings: \$520,000
                               Total Equity: \$620,000
Total Assets: \$850,000         Total L + E: \$850,000

Part IV: The Cash Flow Statement - Show Me the Money#

The Three Buckets of Cash Flow:

Operating Activities (Core business)
- Cash from customers
- Cash to suppliers and employees
- This should be positive for healthy companies
Investing Activities (Building for future)
- Buying equipment or buildings (negative)
- Selling assets (positive)
- Usually negative for growing companies
Financing Activities (Funding the business)
- Borrowing money or issuing stock (positive)
- Paying back loans or dividends (negative)
- Varies based on company stage

The Critical Insight: You can be profitable on paper but run out of cash!

🎯 AI Learning Support - Making Connections

Learning Goal: See how business decisions appear across all three statements.

Professional Prompt Sample A (Grade: A): “I want to trace what happens when a coffee shop buys a $10,000 espresso machine with cash. My understanding: Balance Sheet shows -$10,000 cash and +$10,000 equipment so assets stay the same. Cash Flow Statement shows -$10,000 in investing activities. Income Statement shows nothing immediately but will show depreciation expense over time. Is my thinking correct? What am I missing?”

🛠️ Builder’s Mindset:

✅ Specific scenario: Concrete example to analyze
✅ Shows reasoning: Demonstrates thought process
✅ Seeks validation: Wants to confirm understanding
✅ Asks for gaps: Open to learning more

😞 Weak Prompt Sample (Grade: D): “Explain all three financial statements to me.”

💤 Copy-Paste Mentality:

❌ No vision: What kind of dashboard?
❌ No effort: Expects complete solution
❌ No learning: Won’t understand the code
❌ No customization: Generic is useless

🎯 Your Challenge: Create a prompt about a business transaction you’re curious about (hiring employees, taking a loan, etc.) and trace its impact.

Section 3: The Financial Gym - Partner Practice & AI Copilot Learning#

Round 1: Financial Statement Scavenger Hunt#

Solo Activity (10 minutes)

Using this simplified tech startup data, answer these questions:

# TechStartup Inc. - Year 1 Summary
income_statement = {
    'revenue': 1000000,  # \$1M in sales
    'cogs': 300000,      # Cost of goods sold
    'salaries': 500000,  # Employee costs
    'rent': 100000,      # Office rent
    'marketing': 200000, # Advertising
    'interest': 50000    # Loan interest
}

balance_sheet = {
    'cash': 200000,
    'accounts_receivable': 150000,  # Customer IOUs
    'equipment': 300000,
    'total_liabilities': 400000,
    'equity': 250000
}

cash_flow = {
    'operating_cf': -80000,   # Negative!
    'investing_cf': -300000,  # Bought equipment
    'financing_cf': 500000    # Raised money
}

Questions to Answer:

Is the company profitable? (Calculate net income)
Despite being profitable/unprofitable, why is operating cash flow negative?
How did they afford to buy $300,000 of equipment?
What’s their burn rate if this continues?

Burn Rate: Burn rate is how quickly a company is spending its cash reserves each month, usually by comparing how much more money goes out than comes in from running the business.

Most of the time, when people talk about burn rate, they mean the “operating burn rate”—how much cash the company is losing from its core business activities (ignoring cash from new loans or investments). Sometimes, people include all cash flows (operating, investing, and financing), but for understanding how long a company can survive without new funding, it’s best to focus on operating burn rate.

Example:
Imagine a startup with these cash flows for the year:

Operating cash flow: –$80,000 (the business lost $80,000 from its normal activities)

Investing cash flow: –$300,000 (the company bought equipment)

Financing cash flow: +$500,000 (the company raised money from investors)

The operating burn rate is $80,000 per year, or about $6,667 per month. This tells you how much the business is losing each month from its normal operations.

If the company started with $200,000 in cash and keeps losing $6,667 per month, it would run out of money in about 30 months—unless it raises more money or becomes profitable. This “time left” is called the cash runway.

Note: If you include investing and financing, the net cash flow is positive (because of the money raised), but that doesn’t reflect the ongoing business health.

Round 2: AI Copilot Learning Phase#

📚 AI Learning Support - Pattern Recognition

Learning Goal: Spot healthy vs. concerning patterns in financial statements.

Professional Prompt Sample A (Grade: A): “I’m looking at a startup with $1M revenue, -$150K net income, and -$80K operating cash flow. The difference between loss and cash flow seems to be from $150K in accounts receivable. This suggests they’re selling but not collecting cash quickly. What other patterns should I look for to determine if this is a normal growth company issue or a red flag?”

💼 Investment-Ready Analysis:

✅ Specific numbers: Shows real analysis
✅ Identifies pattern: Sees the AR issue
✅ Seeks context: Knows patterns need interpretation
✅ Risk awareness: Looking for red flags

🚩 Weak Prompt Sample (Grade: D): “Is this company good or bad?”

🛑 Amateur Hour:

❌ No data: Provides no context
❌ Binary thinking: Business isn’t black/white
❌ Lazy question: No analytical effort
❌ Useless answer: Will get useless response

🎯 Your Mission: Write a prompt that helps you understand what healthy vs. concerning cash burn looks like for different types of companies.

Round 3: Partner Teaching Exercise#

The Story Behind the Numbers

Partner A: Pick one of these business events:

“We just landed a huge $500K contract”
“We bought out our competitor”
“We raised $2M from investors”
“We’re giving all employees a 20% raise”

Partner B: Explain what happens to each financial statement

Example for “Landed $500K contract”:

Income Statement: +$500K revenue (when work is done)
Balance Sheet: +$500K accounts receivable, then converts to cash
Cash Flow: Nothing until customer actually pays

Round 4: Build Your Financial Dashboard#

🏗️ AI Learning Support - Building Analysis Tools

Learning Goal: Create practical tools for financial analysis.

Professional Prompt Sample A (Grade: A): “I built a financial health dashboard that goes beyond basic ratios. I’m thinking of including: 1) Burn rate calculator for startups, 2) Working capital trends, 3) Quality of earnings score. What other metrics would make this useful for analyzing early-stage companies specifically? I want it practical.”

🛠️ Builder’s Mindset:

✅ Specific features: Clear tool vision
✅ User focus: Targets early-stage companies
✅ Practical emphasis: Real use over theory
✅ Expandable thinking: Open to suggestions

🗑️ Weak Prompt Sample (Grade: D): “Give me financial dashboard code.”

💀 Copy-Paste Mentality:

❌ No vision: What kind of dashboard?
❌ No effort: Expects complete solution
❌ No learning: Won’t understand the code
❌ No customization: Generic is useless

🎯 Your Challenge: Design a prompt that helps you add one specific warning indicator for companies in financial distress.

# CREATE A SIMPLE FINANCIAL HEALTH CHECKER

def financial_health_check(revenue, net_income, operating_cf, cash, liabilities):
    """
    Basic financial health indicators
    """
    # Profitability check
    if net_income > 0:
        profit_status = "✅ Profitable"
        profit_margin = net_income / revenue
    else:
        profit_status = "❌ Losing money"
        profit_margin = net_income / revenue
    
    # Cash flow check
    if operating_cf > 0:
        cf_status = "✅ Positive cash generation"
    else:
        cf_status = "⚠️ Burning cash"
    
    # Liquidity check
    if cash > liabilities * 0.5:
        liquidity_status = "✅ Strong cash position"
    else:
        liquidity_status = "⚠️ Potential cash crunch"
    
    # Calculate months of runway
    if operating_cf < 0:
        monthly_burn = -operating_cf / 12
        runway_months = cash / monthly_burn
    else:
        runway_months = float('inf')
    
    print("FINANCIAL HEALTH REPORT")
    print("=" * 30)
    print(f"Profitability: {profit_status} ({profit_margin:.1%} margin)")
    print(f"Cash Flow: {cf_status}")
    print(f"Liquidity: {liquidity_status}")
    if runway_months != float('inf'):
        print(f"Runway: {runway_months:.1f} months at current burn rate")
    else:
        print(f"Runway: Infinite (cash flow positive)")

# Test with our TechStartup data
revenue = 1000000
net_income = revenue - 300000 - 500000 - 100000 - 200000 - 50000  # -150000
operating_cf = -80000
cash = 200000
liabilities = 400000

financial_health_check(revenue, net_income, operating_cf, cash, liabilities)

🔧 AI Learning Support - Code Enhancement

Learning Goal: Extend basic analysis with industry context.

Professional Prompt Sample A (Grade: A): “I built a financial health checker that flags companies with negative cash flow. But I realize some companies like Amazon had negative operating cash flow for years while building their business. How can I modify my code to consider company stage (startup/growth/mature) and industry (tech/retail/manufacturing) when setting healthy ranges?”

🏆 Thoughtful Development:

✅ Working code: Shows implementation
✅ Recognizes limitations: Knows one-size doesn’t fit all
✅ Business awareness: Cites Amazon example
✅ Seeks improvement: Wants contextual analysis

💩 Weak Prompt Sample (Grade: D): “Write code to analyze financial statements.”

🗑️ Zero Effort:

❌ No attempt: Expects complete solution
❌ No specifications: What analysis?
❌ No learning: Copy-paste mentality
❌ No growth: Won’t understand the code

🎯 Your Challenge: Enhance the health checker to identify one specific red flag pattern you learned about today.

Section 4: The Financial Coaching - Your DRIVER Learning Guide#

Complete DRIVER Case Study: The Startup Investment Decision#

Scenario: Your rich uncle heard you’re studying finance. He shows you financials for two gaming startups and says: “I’ll invest $100K in whichever one you recommend. You have 48 hours.”

D - Define & Discover#

Define the Challenge: Make investment decision between two gaming startups.

Discover the information needed to solve the Challenge: Need to understand the financial statements of both startups.

Action: Ask your uncle to show you the financial statements of both startups.

Data Received from your uncle:

# GAMING STARTUP COMPARISON FRAMEWORK

# Startup A: MobileGames Inc
startup_a = {
    'name': 'MobileGames Inc',
    'revenue': [100000, 300000, 800000],  # 3 years
    'net_income': [-200000, -150000, -50000],
    'operating_cf': [-180000, -120000, -30000],
    'cash': 500000,
    'monthly_active_users': [50000, 150000, 400000],
    'revenue_per_user': [2.0, 2.0, 2.0],  # Stable ARPU
    'funding_raised': 1000000
}

# Startup B: ConsoleStudio
startup_b = {
    'name': 'ConsoleStudio',
    'revenue': [500000, 600000, 700000],  # Slower growth
    'net_income': [-100000, -50000, 50000],  # Profitable!
    'operating_cf': [-80000, 20000, 80000],  # Cash positive!
    'cash': 300000,
    'monthly_active_users': [100000, 110000, 120000],
    'revenue_per_user': [5.0, 5.5, 5.8],  # Growing ARPU
    'funding_raised': 500000
}

Futher Discover:

Reading financial statements requires:

Knowing what each statement reveals
Understanding how they connect
Spotting patterns and red flags
Asking the right questions

🎯 AI Learning Support - Problem Framing

Learning Goal: Structure your analysis approach.

Professional Prompt Sample A (Grade: A): “I need to compare two gaming startups for investment. My initial framework: 1) Growth trajectory (revenue trends), 2) Path to profitability (margin trends), 3) Cash runway (burn rate vs. cash), 4) Business model quality (recurring vs. one-time revenue). What gaming-specific metrics should I add? What red flags are unique to gaming startups?”

💡 Strategic Thinking:

✅ Clear framework: Structured approach
✅ Industry awareness: Asks for gaming specifics
✅ Risk focus: Seeks red flags
✅ Decision oriented: Tied to investment choice

❌ Weak Prompt Sample (Grade: D): “Which startup should I pick?”

🤦 Why This Fails:

❌ No framework: Random decision
❌ No analysis: Expects answer without work
❌ No learning: Won’t develop judgment
❌ Lazy approach: Uncle deserves better

🎯 Your Challenge: Create a prompt that helps you understand what makes gaming companies different from other tech startups.

R - Represent#

Analysis Framework Structure: Compute scores for each startup based on the framework below.

Investment Decision Framework
├── Growth Analysis
│   ├── Revenue Growth Rate
│   ├── User Growth Metrics
│   └── Market Share Trends
├── Profitability Path
│   ├── Gross Margin Trends
│   ├── Operating Leverage
│   └── Time to Breakeven
├── Cash Position
│   ├── Current Runway
│   ├── Burn Rate Trends
│   └── Funding History
└── Business Quality
    ├── Revenue Predictability
    ├── Customer Concentration
    └── Competitive Moat

I - Implement#

Building the Analysis

# GAMING STARTUP COMPARISON FRAMEWORK
# Data Received from your uncle as the input:
# Startup A: MobileGames Inc
startup_a = {
    'name': 'MobileGames Inc',
    'revenue': [100000, 300000, 800000],  # 3 years
    'net_income': [-200000, -150000, -50000],
    'operating_cf': [-180000, -120000, -30000],
    'cash': 500000,
    'monthly_active_users': [50000, 150000, 400000],
    'revenue_per_user': [2.0, 2.0, 2.0],  # Stable ARPU
    'funding_raised': 1000000
}

# Startup B: ConsoleStudio
startup_b = {
    'name': 'ConsoleStudio',
    'revenue': [500000, 600000, 700000],  # Slower growth
    'net_income': [-100000, -50000, 50000],  # Profitable!
    'operating_cf': [-80000, 20000, 80000],  # Cash positive!
    'cash': 300000,
    'monthly_active_users': [100000, 110000, 120000],
    'revenue_per_user': [5.0, 5.5, 5.8],  # Growing ARPU
    'funding_raised': 500000
}

# Function to analyze startup
# In Python Function is a block of code that performs a specific task. It is reusable--BUILD ONCE, USE MANY TIMES.

# In the code below, Function is defined using the def keyword
# Function name is analyze_startup
# Function takes one parameter startup
def analyze_startup(startup):
    """Comprehensive startup analysis"""
    name = startup['name']
    
    # Growth metrics from year 0 to year 2
    revenue_growth = (startup['revenue'][2] / startup['revenue'][0]) ** 0.5 - 1
    user_growth = (startup['monthly_active_users'][2] / startup['monthly_active_users'][0]) ** 0.5 - 1
    
    # Profitability trajectory
    latest_margin = startup['net_income'][2] / startup['revenue'][2]
    margin_improvement = (startup['net_income'][2] - startup['net_income'][0]) / startup['revenue'][2]
    
    # Cash analysis
    latest_burn = startup['operating_cf'][2] / 12  # Monthly
    if latest_burn < 0:
        runway_months = startup['cash'] / abs(latest_burn)
    else:
        runway_months = float('inf')
    
    # Business quality
    arpu_trend = startup['revenue_per_user'][2] - startup['revenue_per_user'][0]
    
    print(f"\n{name} ANALYSIS")
    print("=" * 40)
    print(f"Revenue CAGR: {revenue_growth:.1%}")
    print(f"User CAGR: {user_growth:.1%}")
    print(f"Latest Margin: {latest_margin:.1%}")
    print(f"Margin Improvement: {margin_improvement:.1%} over 2 years")
    
    if runway_months == float('inf'):
        print(f"Cash Flow: POSITIVE (Infinite runway)")
    else:
        print(f"Runway: {runway_months:.1f} months")
    
    print(f"ARPU Trend: \${arpu_trend:+.2f} over 2 years")
    
    # Investment score (simple framework)
    score = 0
    if revenue_growth > 0.5: score += 2  # High growth
    if user_growth > 0.5: score += 2     # User traction
    if latest_margin > -0.1: score += 2  # Near profitable
    if runway_months > 18 or runway_months == float('inf'): score += 2  # Safe runway
    if arpu_trend > 0: score += 2        # Monetization improving
    
    print(f"\nInvestment Score: {score}/10")
    
    return score

# Run analysis
score_a = analyze_startup(startup_a)
score_b = analyze_startup(startup_b)

print("\n" + "="*50)
print("INVESTMENT RECOMMENDATION")
if score_a > score_b:
    print(f"Recommend: {startup_a['name']} (Score: {score_a} vs {score_b})")
elif score_b > score_a:
    print(f"Recommend: {startup_b['name']} (Score: {score_b} vs {score_a})")
else:
    print("Both equal scores - need qualitative analysis")

💻 AI Learning Support - Gaming Industry Insights

Learning Goal: Understand gaming-specific financial patterns.

Professional Prompt Sample A (Grade: A): “I notice MobileGames has high user growth but flat ARPU, while ConsoleStudio has slow user growth but rising ARPU. In gaming, which is more sustainable? I’m thinking mobile games often rely on volume with low ARPU, while console games have fewer but higher-paying users. How should this affect my investment recommendation?”

🎮 Industry-Savvy Analysis:

✅ Pattern recognition: Spots the tradeoff
✅ Business model understanding: Knows mobile vs console
✅ Strategic thinking: Considers sustainability
✅ Decision focus: Ties to recommendation

🎰 Weak Prompt Sample (Grade: D): “Which gaming company is better?”

👎 Surface Level:

❌ No criteria: Better at what?
❌ No analysis: Shows no work
❌ Generic question: Could apply to any industry
❌ No learning: Won’t develop expertise

🎯 Your Challenge: Create a prompt exploring how different gaming monetization models (ads, in-app purchases, subscriptions) appear in financial statements.

V - Validate#

Reality Check Your Analysis

📋 AI Learning Support - Validation Strategies

Learning Goal: Develop systematic validation approaches.

Professional Prompt Sample A (Grade: A): “I’m validating my startup analysis and want to ensure I’m not missing critical issues. I’ve checked revenue quality, cash burn trends, and unit economics. What validation tests do experienced VCs use that aren’t obvious? Specifically for gaming companies, what are the hidden risks in the numbers?”

🔍 Due Diligence Thinking:

✅ Current checklist: Shows existing process
✅ Seeks blind spots: Knows there’s more
✅ Experience seeking: Wants VC-level insights
✅ Industry specific: Gaming focus

🙈 Weak Prompt Sample (Grade: D): “Is my analysis correct?”

🤮 Validation Fail:

❌ No specifics: What analysis?
❌ Binary thinking: Right/wrong too simple
❌ No framework: How to even check?
❌ Lazy approach: No self-validation

🎯 Your Final Challenge: Create a prompt that helps you build a “red flag checklist” for gaming company financials.

# VALIDATION FRAMEWORK

def validate_assumptions(startup):
    """Check if our analysis assumptions hold"""
    name = startup['name']
    print(f"\n{name} VALIDATION CHECKS")
    print("-" * 40)
    
    # Check 1: Revenue Quality
    # Is growth coming from users or price?
    user_growth = startup['monthly_active_users'][2] / startup['monthly_active_users'][0] - 1
    revenue_growth = startup['revenue'][2] / startup['revenue'][0] - 1
    
    if revenue_growth > user_growth * 1.5:
        print("✅ Revenue growth exceeds user growth - good monetization")
    else:
        print("⚠️ Revenue growth lags user growth - monetization challenge")
    
    # Check 2: Cash Flow Trajectory
    cf_improvement = startup['operating_cf'][2] - startup['operating_cf'][0]
    if cf_improvement > 0:
        print("✅ Cash flow improving")
    else:
        print("❌ Cash flow deteriorating")
    
    # Check 3: Unit Economics
    latest_arpu = startup['revenue_per_user'][2]
    if latest_arpu > 2:  # Industry benchmark
        print(f"✅ Strong ARPU: ${latest_arpu}")
    else:
        print(f"⚠️ Low ARPU: ${latest_arpu} - need volume")

# Validate both startups
validate_assumptions(startup_a)
validate_assumptions(startup_b)

E - Evolve#

Take It Further

Your analysis can evolve to include:

Ratio Analysis: Turn raw statement data into comparable metrics (see below)
Cohort Analysis: Track user retention over time
LTV/CAC Ratios: Lifetime value vs. acquisition cost
Competitive Analysis: Market share trends
Scenario Modeling: Best/base/worst cases
Exit Analysis: Potential acquisition values

Common Financial Ratios to Explore

Calculate at least these five ratios (and feel free to add others that interest you):

ROA (Return on Assets) = Net Income / Total Assets
ROE (Return on Equity) = Net Income / Total Equity
Profit Margin = Net Income / Revenue
Current Ratio = Current Assets / Current Liabilities
EPS (Earnings Per Share) = Net Income / Shares Outstanding

These provide a foundation, but don’t let them limit your exploration.

R - Reflect#

🎯 Reflecting on Your Learning Journey

Learning Goal: Understand the value of reflection and reporting in your learning process.

Close your eyes and think about what you’ve learned so far.
What are the most important things you’ve learned?
Anything revealed your learning style?
How does Peer learning help you?
How does Peer+AI learning help you?
How would you make your learning journey more effective and engaging and enjoyable?

A Note on Learning#

Through this assignment, you’re developing many capabilities simultaneously - some you’ll notice immediately, others will emerge over time. Every struggle, breakthrough, and “aha” moment is part of your growth.

Focus on building your understanding and finding your own way to explain these concepts. There’s no single “right” approach - what matters is that you engage deeply with the material and make it your own.

Welcome to the journey of becoming a financial analyst in the AI era! You will DRIVE the AI for sure!

Section 5: Assignment - Real Company Financial Analysis#

Assignment Overview#

Analyze the financial health of one publicly traded company selected from the following: Coca-Cola (KO), Walmart (WMT), or Procter & Gamble (PG). Your analysis must employ the three core financial statements—Income Statement, Balance Sheet, and Cash Flow Statement—to assess company performance, financial position, and cash generation capability. These companies have been selected for their clear business models and accessible financial data.

DRIVER Framework Requirement#

DRIVER is your analytical work process, not a documentation format.

You must use DRIVER to conduct your analysis, not to describe completed work retrospectively. This means beginning your analytical work with the Define & Discover stage and completing both D and R stages before proceeding to implementation.

Work Process Requirements:

Begin your analytical work with the Define & Discover stage
Complete the Represent stage to plan your analytical approach
Proceed to Implementation only after D and R stages are documented
Document your process as you work through each stage sequentially

Submission Requirements:

All submissions must include:

DRIVER Analysis Document demonstrating sequential stage completion
Video presentation covering all six DRIVER stages in order: D → R → I → V → E → R
Code repository with executable analysis

Your documentation must reflect chronological progression through the analytical process, not retrospective justification of completed work.

Critical Requirement: Assignments submitted without adequate Define & Discover stage documentation completed before implementation will receive a grade of zero without further evaluation.

Refer to DRIVER Framework: Assignment Guidelines for complete requirements and grading criteria.

Specific Requirements#

Financial Analysis Requirements#

Your analysis must include:

Income Statement Analysis
- Revenue and expense structure examination
- Profitability assessment across reporting periods
- Margin analysis and trend identification
Balance Sheet Analysis
- Asset composition and utilization evaluation
- Liability structure and leverage assessment
- Equity position and capital structure analysis
Cash Flow Statement Analysis
- Operating cash flow generation assessment
- Investing activity evaluation
- Financing activity analysis
- Liquidity and solvency evaluation
Financial Ratio Calculation (minimum five required):
- Return on Assets (ROA) = Net Income / Total Assets
- Return on Equity (ROE) = Net Income / Total Equity
- Profit Margin = Net Income / Revenue
- Current Ratio = Current Assets / Current Liabilities
- Earnings Per Share (EPS) = Net Income / Shares Outstanding
Trend Analysis
- Year-over-year comparison of key metrics
- Identification of significant changes or patterns
- Assessment of trajectory (improving, stable, declining)

Additional ratios and analytical depth beyond minimum requirements are encouraged.

Technical Requirements#

Python implementation for automated ratio calculation
Data extraction from financial statement sources
Data validation procedures to ensure accuracy
Year-over-year comparison automation
Code documentation explaining financial logic

Deliverables#

1. DRIVER Analysis Document

Format: Markdown, PDF, or Jupyter Notebook section
Structure: All six DRIVER stages as specified in framework guidelines
Content: Demonstrates systematic progression through analytical process

2. Video Presentation

Content: All six DRIVER stages with code demonstration
Delivery: Clear explanation suitable for finance professionals
Technical: Screen recording showing working code execution

3. Code Repository

Platform: Google Colab, Jupyter Notebook, or GitHub repository
Requirements: Executable code without errors, comprehensive documentation
Includes: README explaining DRIVER application and data sources

Learning Objectives Alignment#

This assignment assesses your ability to:

Extract and interpret information from corporate financial statements
Calculate and analyze fundamental financial ratios
Identify trends and patterns in financial data
Apply the DRIVER framework to financial analysis
Integrate financial theory with technical implementation
Communicate analytical findings effectively

Assessment#

Your work will be evaluated according to the grading structure specified in DRIVER Framework: Assignment Guidelines:

Total: 100 points

1. Financial Concepts Accuracy (50 points)#

Your understanding will be assessed on the following session-specific financial concepts:

Income Statement components and relationships: Revenue, Cost of Goods Sold (COGS), Gross Profit, Operating Expenses, Operating Income, Net Income
Balance Sheet structure and accounting equation: Assets = Liabilities + Equity, asset/liability classifications
Cash Flow Statement categories: Operating activities, Investing activities, Financing activities
Financial ratio calculation and interpretation: ROA, ROE, Profit Margin, Current Ratio, EPS
Difference between profitability and cash flow: Why companies can be profitable but cash-negative
Year-over-year trend analysis: Identifying significant changes and patterns
Liquidity and solvency assessment: Understanding cash position and financial health indicators

2. Technical Implementation (10 points)#

Code execution and correctness for ratio calculations
Data extraction from financial statements
Data validation procedures
Year-over-year comparison automation
Code organization and documentation

3. Integration of Finance and Technology (20 points)#

Automation of financial calculations beyond manual work
Data-driven insights from statement analysis
Visualization of financial trends and relationships
Demonstrates understanding of why technology enhances financial analysis

4. Following the DRIVER Framework (10 points)#

Define & Discover: Clear problem understanding completed before implementation
Represent: Quality logic mapping and planning for analysis approach
Implement: Systematic execution of financial statement analysis
Validate: Verification of calculations and cross-checking data sources
Evolve: Pattern recognition across financial statements
Reflect: Learning insights about financial statement analysis

Critical Gate: Assignments without adequate Define & Discover documentation before implementation receive zero.

5. Clear Communication and Explanation (10 points)#

Video clearly explains financial statement analysis journey
Complex concepts explained simply
Logical flow from statement reading to insights
Demonstrates genuine understanding of financial relationships

Total: 100 points

Data Sources#

Financial statement data may be obtained from:

Yahoo Finance (finance.yahoo.com) - Accessible financial data portal
SEC EDGAR Database (sec.gov/edgar) - Official company filings
Company Investor Relations Websites - Direct from source
Financial Data APIs - yfinance Python library for programmatic access

Verify data accuracy by cross-referencing multiple sources. Document your data sources in your DRIVER Analysis Document.

Submission#

Submit all deliverables according to your instructor’s specified method and deadline.

Ensure your DRIVER Analysis Document clearly demonstrates that you completed the Define & Discover stage before proceeding to implementation. Your documentation should reflect progressive development through the analytical process, not retrospective justification.

Refer to DRIVER Framework: Assignment Guidelines for complete documentation requirements, grading criteria, and framework application guidance.

Section 6: Reflect & Connect - Financial Insights Discussion#

Individual Reflection Questions#

Before discussion, consider:

The Aha Moment: What surprised you most about how financial statements connect?
The Reality Check: How does knowing this change how you view companies you interact with daily (Apple, Netflix, your local coffee shop)?
The Skill Building: Which part was hardest - understanding concepts or implementing analysis?
The Future Application: How will you use this in your career or personal investing?

Small Group Discussion Topics#

Round 1: Profit vs. Cash Paradox Share examples from real companies or your own ideas: How can a company be profitable but run out of cash?

Round 2: The Story Behind the Numbers Pick a company everyone knows. What story do you think their financial statements tell? Growth? Struggle? Transformation?

Round 3: The Human Element Discuss: Financial statements are created by humans with incentives. What might motivate companies to present numbers in certain ways?

Class Synthesis#

You Now Have Superpowers:

You can read any company’s financial story
You can spot the difference between hype and health
You can ask intelligent questions about any business
You can build tools to analyze companies systematically

Remember: Every successful investor, CEO, and entrepreneur speaks this language fluently. Today, you joined their ranks.

Section 7: Looking Ahead - From Understanding Statements to Using Time Value#

You’ve Built These Skills:#

✓ Financial Literacy: You can read all three statements ✓ Pattern Recognition: You spot healthy vs. concerning trends ✓ Cash Flow Awareness: You know profit doesn’t equal cash ✓ Analysis Tools: You can build basic financial dashboards ✓ Critical Thinking: You question the numbers

Next Session Preview: The Time Value of Money#

Now that you can read financial statements, you’re ready to learn finance’s most powerful concept: money today is worth more than money tomorrow.

In Session 2, you’ll discover:

Why a dollar today > a dollar tomorrow
How to compare cash flows across time
The math that powers every financial decision
Tools used by every finance professional

The financial statements you just mastered provide the cash flow forecasts. Time Value of Money tells you what those cash flows are actually worth.

Pre-Session 2 Challenge#

Think about these questions:

Would you rather have $1,000 today or $1,100 in one year?
What if it was $1,000 today or $2,000 in one year?
At what point would you switch your preference?

Your answer reveals your personal “discount rate”—a concept that drives trillions in financial decisions.

Round 1 Solutions:

# Question 1: Is the company profitable?
revenue = 1000000
total_expenses = 300000 + 500000 + 100000 + 200000 + 50000
net_income = revenue - total_expenses
print(f"Net Income: \${net_income}")  # -\$150,000 - NOT profitable

# Question 2: Why negative operating cash flow?
# Despite \$150K loss, operating CF is only -\$80K
# Difference of \$70K likely from:
# - Accounts receivable increase (sold but not collected)
# - Depreciation (non-cash expense)
# - Accounts payable increase (bought but not paid)

# Question 3: How afford equipment?
# Financing CF of \$500K (raised money from investors/loans)
# This covered operating loss (\$80K) and equipment (\$300K)

# Question 4: Burn rate
monthly_burn = 80000 / 12  # \$6,667 per month
runway = 200000 / monthly_burn  # 30 months of runway