Financial Statements

1. Financial Statements Business Management

2. 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.

3. Financial Statements • Income Statement • Cash Flow Statement • Balance Sheet

4. The Income Statement • Prepared at the end of each month • Tracks income and expenses • Also called a profit and loss statement

5. 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)

6. 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

7. Example of an Income Statement

8. 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.

9. Determining the Break-Even Point • Define your unit of sale. • Figure your gross profit per unit. [ Selling Price per Unit – Cost of Goods Soled 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 ]

10. Depreciation • If you buy expensive, long-lasting assets, you will want to include depreciation in your income statement. • Depreciation is when a certain portion of the cost of an asset is subtracted each year until the asset’s value reaches zero.

11. 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.

12. 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.

14. Example

15. 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

16. 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

17. The Financial Equation Assets – Liabilities = Owner’s Equity

18. Example of a Balance Sheet

19. Summary • Income Statement • Break-Even Analysis • Financial Ratios • Cash Flow Statement • Balance Sheet