Financial Statements. By John C. Kelly. Discussion Question. How do you measure your personal financial condition?. Net Worth. Cash + investments + property Minus Bills + loans + mortgages Equals Your Net Worth. Discussion Question. How much of your net worth is usable?.
John C. Kelly
How do you measure your
personal financial condition?
Cash + investments + property
Bills + loans + mortgages
Your Net Worth
How much of your net worth is usable?
That which is liquid
That which can be easily converted to cash
Cash in the bank
Investments you can sell
Amount you can borrow
Net worth = Asset - Liabilities
Cash in Bank
Credit Card Balances
Net WorthBalance Sheet Format
Assets = Liabilities + Net Worth
What does your balance sheet look like
the day you start your business?
Amount Owed $0
Equity $1000Initial Balance Sheet
All names for the same thing. Think of it like the equity in your house, which is the market value minus the mortgage amount. It is money you could have if you sold your house. Of course, you would get a little less because of the cost of selling.
Profit = Revenue – Expenses
Cost of Goods Sold
General & Administrative
Provision for Income Tax
Revenue = Sales = Gross Income
Profit = Earnings = Net Income
What happens when you make a sale but don’t receive the money right away?
See Pub 583 and Pub538 Accounting Periods
Use cash accounting
as long as possible
How should you account for the
purchase of a car or a large piece
of equipment like a pizza oven?
Depreciation is classic example of accrual accounting where the cost of an asset is spread over the expected life of the asset. For example, a car is not expensed in the year it is purchased, rather it is expensed over a period of years. If the depreciation period is five years. Only 1/5 of the cash spent will show up as an expense in the year the money is spent. Therefore, the change in cash on hand shown in the balance sheet will not jive with the profit shown on the income statement. The cash flow statement corrects for this.
Perfectly legal, perfectly confusing
SEC Edgar Financial Database
How would you use the numbers in the financial statements to evaluate the health of a business?