Financial Statements Business Management
Today’s Objectives • Interpret basic financial statements, including cash flow, income statement, and a balance sheet. • Prepare a budget to include short-term and long-term expenditures.
Essential Questions • What is the purpose of each financial statement: income statement, cash flow, and balance sheet? • Which figures are included on each financial statement? • Explain the significance of the break-even point as it relates to finances. • What is the financial equation and how does it relate to the balance sheet?
Financial Statements • Income Statement • Cash Flow Statement • Balance Sheet
The Income Statement • Prepared at the end of each month • Tracks income and expenses • Also called a profit and loss statement Purpose of an Income Statement
Preparing the Income Statement • Sales – how much money the company will be receiving for selling a product • Total Cost of Goods Sold – the cost of making one unit multiplied by the number of units sold • Gross Profit = sales – cost of goods sold • Operating Costs – items that must be paid to operate a business including fixed costs and variable costs (USAIIR) Figures Included on an Income Statement
Preparing the Income Statement • Profit Before Taxes – profit before taxes but after ALL other costs have been paid • Taxes – payments required by federal, state, and local governments based on a business’s profit (sales tax, income tax) • Net Profit or Net Loss – a business’s profit or loss after taxes are paid Figures Included on an Income Statement
Depreciation • If you buy expensive, long-lasting assets, you will want to include depreciation in your income statement (fixed cost). • Depreciation is when a certain portion of the cost of an asset is subtracted each year until the asset’s value reaches zero.
Calculating Depreciation • Hometown Restaurant buys $3,000 worth of tables and chairs that will last approximately 5 years before needing to be replaced. • The income statement shows that $600 is subtracted each year to “save” for the new tables & chairs to be purchased in the future.
Financial Ratio Analysis • Entrepreneurs don’t just look at their income statements… they analyze them by dividing sales into each line item. • Each item can then be expressed as a percentage of sales. • Relating each piece of the income statement to sales will help you notice changes in costs from month to month. Figures Included on an Income Statement
Summarizing theIncome Statement • Purposetrack monthly income & expenses • Includestotal of seven (7) figures plus ratios • Also accounts for depreciation, which is an estimated or projected figure
The Break-Even Analysis • When sales and costs are equal, the total at the bottom of the income statement is zero. • This condition is called the break-even point. • Many new businesses lose money in the beginning, but a business must at least break even to survive. • Businesses must know how many units to sell during a month to cover costs and break even. Significance of Break-Even point
Determining the Break-Even Point • Define your unit of sale. • Figure your gross profit per unit. [ Selling Price per Unit – Cost of Goods Sold per Unit = Gross Profit per Unit ] • Calculate break-even units. • Typically calculated assuming all operating costs are fixed. [ Monthly Fixed Costs ÷ Gross Profit per Unit = Break-Even Units ] Significance of Break Even Point
The Cash Flow Statement • Records inflows and outflows of cash when they actually occur • Takes out sales on credit and depreciation so that business owners can see how much money actually flowed in/out in a month • All sources of cash that come into the business with actual dates they are received (receipts) • Cash outflows that must be made within the month (disbursements) • Net change in cash flow before and after taxes Purpose of & Figures Included on a Cash Flow Statement
The Balance Sheet • Prepared at the end of the business’s fiscal year • Usually October 1 to September 30 • Based on the Financial Equation • Assets – all items of worth owned by the business • Liabilities – all debts owed by the business • Owner’s Equity – also called capital or net worth; amount left over after liabilities are subtracted from assets Purpose of & Figures Included on a Balance Sheet
The Financial Equation Assets – Liabilities = Owner’s Equity
Closing Task • Describe an income statement – what is its purpose and what is included? • Describe a cash flow statement – what is its purpose and what is included? • Describe the balance sheet – what is its purpose and what is included? • Write the financial equation. How does it relate to the balance sheet? • Why should business owners complete a Break-Even Analysis?
Understanding a Balance Sheet Activity Liabilities • Accts Pay. – Topline Owner’s Equity • Owner’s Capital • Expense? • Investment? • Revenue? • Withdrawal? Assets • Cash • Accts Rec. – Dean Mills • Supplies • Insurance