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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?.

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financial statements

Financial Statements


John C. Kelly

discussion question
Discussion Question

How do you measure your

personal financial condition?

net worth
Net Worth

Cash + investments + property


Bills + loans + mortgages


Your Net Worth

discussion question1
Discussion Question

How much of your net worth is usable?

usable net worth
Usable Net Worth

That which is liquid

That which can be easily converted to cash

Cash in the bank

Investments you can sell

Amount you can borrow

financial statements1
Financial Statements
  • Sources and Uses of Funds – What money do you need to start your business and where will you get it.
  • Balance Sheet – Snapshot of financial condition
  • Income Statement – Financial performance over an interval of time. Also called profit and loss or P&L.
  • Cash Flow Statement – Similar to P&L but includes cash expenditures which are not expenses buying capital equipment and loan principle payments.
the balance sheet
The Balance Sheet
  • A snapshot of the financial condition of the company at a moment in time.
  • You can think of it as a statement of what would be left if all the assets were sold and all the bills paid. An individual would call this a net worth statement.

Net worth = Asset - Liabilities

balance sheet format

Cash in Bank

Accounts Receivable

Prepaid Expenses



Real Estate


Accounts payable

Accrued payroll

Bank loans


Credit Card Balances

Net Worth

Balance Sheet Format

Assets = Liabilities + Net Worth

discussion question2
Discussion Question

What does your balance sheet look like

the day you start your business?

initial balance sheet

Cash $1000


Amount Owed $0


Equity $1000

Initial Balance Sheet
balance sheet terminology
Balance Sheet Terminology
  • Net Worth =
  • Shareholder’s Equity =
  • Owner’s Equity =
  • Equity =
  • Book Value

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.

income statement
Income Statement
  • Measures financial performance over time. Balance sheets are snapshots. Income statements are interval oriented.
  • Measures profit over an interval of time.

Profit = Revenue – Expenses

income statement format
Income Statement Format


Cost of Goods Sold

Gross Profit

Selling Expenses

General & Administrative

Net Profit

Provision for Income Tax


income statement terminology
Income Statement Terminology
  • Income, revenue, profit, and earnings are all frequently used interchangeable with conflicting meanings.
  • The words net and gross are some times used to clarify meaning.
  • I say

Revenue = Sales = Gross Income

Profit = Earnings = Net Income

discussion question3
Discussion Question

What happens when you make a sale but don’t receive the money right away?

accrual vs cash accounting
Accrual Vs Cash Accounting
  • Cash accounting, like you do in your personal life, says an expense occurs when the cash is spent, and income occurs when the cash is received.
  • Accrual accounting assigns expenses and income to the period in which they occur, whether or not cash is received or spent.

See Pub 583 and Pub538 Accounting Periods

golden rule for small biz

Golden Rule for Small Biz

Use cash accounting

as long as possible

discussion question4
Discussion Question

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.

multiple sets of books depending upon the audience
Multiple Sets of BooksDepending Upon the Audience
  • Managers – focus on cash flow
  • Investors – meet SEC requirements
  • Tax Collectors – meet IRS requirements

Perfectly legal, perfectly confusing

sec financial reporting
SEC Financial Reporting
  • 10-K Annual financial report
  • 10-Q Quarterly financial report
  • 8-K Unscheduled report of change in financial condition

SEC Edgar Financial Database

discussion question5
Discussion Question

How would you use the numbers in the financial statements to evaluate the health of a business?

performance ratios
Performance Ratios
  • Revenue per employee
  • Average sale amount
  • Number of sales/deals per month
  • Survival ratio
  • Profit Margin
  • Return on Equity (ROE)
  • Inventory Turnover
  • P/E Ratio
tax reporting
Tax Reporting
  • Small Business Guide – Pub 583
  • Sole Proprietorship – Schedule C
  • Corporation Return – 1120
  • S-Corp Return – 1120S
  • Partnership and LLC - 1065
basic guidelines to get started
Basic Guidelines to Get Started
  • Maintain a separate checking account
  • Pay your taxes
  • Use a payroll service
  • Start with basic Quicken
  • Advance to QuickBooks