Financial Documents Used in a Financial Documents Used in a Small BusinessSmall Business

• Balance Sheet

• Income Statement

• Statement of Cash Flows

Financial Financial RecordsRecords

Balance Balance SheetSheet

Income Income StatementStatement

Cash FlowCash Flow

Understanding Financial Statements

Balance SheetBalance Sheet

Income StatementIncome Statement

Cash-Flow StatementCash-Flow Statement

Together these statements provide information about an organization’s financial strength and ability to meet current obligations, the effectiveness of its sales and collection efforts and its effectiveness in managing its assets. Organizations and individuals use financial statements to spot opportunities and problems, to make business decisions and to evaluate a company’s past performance, present condition, and future prospects. In sum, they’re indispensable.

The Accounting Equation

Owner’s Equity = Net Worth:

Accounting Equation:

Assets = Liabilities + Owner’s Equity

Assets – Liabilities = Owner’s Equity

For thousands of years, businesses and governments have kept records of their assets—valuable items they own or lease, such as equipment, cash, land, buildings, inventory, and

investments. Claims against those assets are liabilities, or what the business owes to its creditors—such as banks and suppliers. For example, when a company borrows money to

purchase a building, the lender or creditor has a claim against the company’s assets. What remains after liabilities have been deducted from assets is owners’ equity:

The Balance Sheet also known as the statement of

financial position, is a snapshot of a company’s financial position on a particular date. This statement includes all elements in the accounting equation and shows the balance

between assets on one side and liabilities and owners’ equity on the other side.

Assets

Liabilities and Shareholder’s Equity

Current Assets Fixed Assets

Current Liabilities

Long-TermLiabilities

Shareholder’sEquity

A new business is started with the owner’s savings of $100,000. The beginning balance sheet will look like this:

Assets Liabilities+Net Worth

CURRENT ASSETS

Cash $100,000 Net Worth $100,000

The owner decides to stock the store and purchases $50K of merchandise, but pays only $25K in cash and promises to pay the balance in 30days. The balance sheet will now look like this: Assets Liabilities+Net Worth

CURRENT ASSETS

Cash $75,000

Inventory $50,000

TOTAL $125,000

CURRENT LIABILITIES

Accounts Payable $ 25,000

Net Worth $100,000

TOTAL $125,000

The BALANCE SHEET is in balance with the addition of $25K thatis owed to the vendor. It is place under current liabilities because it is due to be paid back within one year.

Now the owner decides to buy a building for $100,000. The owner pits $25K down and obtains a $75K mortgage for the remainder. The balance sheet will now look like this: Assets Liabilities+Net Worth

CURRENT ASSETS

Cash $50,000 Inventory $50,000Total C/A $100,000 FIXED ASSETS Building $100,000Total F/A $100,000

TOTAL $200,000

CURRENT LIABILITIES Accounts Payable $ 25,000

Total C/L $ 25,000

LONG TERM DEBTMortgage $ 75,000Total L/T debt $ 75,000

Net Worth $100,000

TOTAL $200,000

The addition of 2 new accounts: one called long-term debt-(longer than 1 year, and fixed assets which includes property, plant, and equipment.

Balance SheetBalance Sheet

A financial statement that shows:– what a business owns– what it owes– how much it is worth at a particular point

in time.

Components include:1. Assets – what the business has of value

2. Liabilities – what the business owes

3. Net worth – what the business is worth

Balance SheetBalance Sheet

An analysis of what a business owns and owes at a certain point in time

BALANCE SHEET

FORMULA

Assets = Liabilities +

Net Worth

Financial Financial RecordsRecords

Balance Balance SheetSheet

Income Income StatementStatement

Cash FlowCash Flow

Balance SheetBalance Sheet

Financial Financial RecordsRecords

Balance Balance SheetSheet

Income Income StatementStatement

Cash FlowCash Flow

Balance SheetBalance Sheet

Types of Assets:

• Fixed Assets – Items of monetary value that are not easily converted into cash:– Equipment– Furniture, fixtures– Land– Buildings

Financial Financial RecordsRecords

Balance Balance SheetSheet

Income Income StatementStatement

Cash FlowCash Flow

Balance SheetBalance Sheet

Types of Assets:

• Current Assets – Items of monetary value that can be converted to cash within twelve months– Cash– Inventory– Supplies– Accounts Receivable

Financial Financial RecordsRecords

Balance Balance SheetSheet

Income Income StatementStatement

Cash FlowCash Flow

Balance SheetBalance Sheet

Intangible Assets Items of value that the business owns that cannot

be seen or touched.

» Copyright Legal right to

exclusive publication, production, sale, or distribution of a literary or artistic work. Copyrights remain in effect for 70 years after the death of the author.

» Patent A legal document

that gives an inventor the sole right to produce, use, and sell an invention.

A patent lasts for 20 years.

» Trademark A name, symbol, or special mark that, when registered, can be used only by a certain business.

» Goodwill Customers' approval and support of a business.

Financial Financial RecordsRecords

Balance Balance SheetSheet

Income Income StatementStatement

Cash FlowCash Flow

Balance SheetBalance Sheet

Other Assets - Cash Value of Insurance Policy

- Cash Value on retirement savings

(401K, IRA)

Financial Financial RecordsRecords

Balance Balance SheetSheet

Income Income StatementStatement

Cash FlowCash Flow

Balance SheetBalance Sheet

Liabilities – Debts owed by the business.

• Current Liabilities– Accounts Payable– Wages Payable

• Long-Term Liabilities– Loans

Financial Financial RecordsRecords

Balance Balance SheetSheet

Income Income StatementStatement

Cash FlowCash Flow

Balance SheetBalance Sheet

Current LiabilitiesFinancial obligations that will be repaid

within one year.Examples include:

Accounts payable - Expenses that have been incurred but not yet paid.

Notes payable - small loans. Example include: money owed on loans for office furniture, landscaping

Salaries payable - Wages owed to employees Income taxes payable - Monies due to the

government

Financial Financial RecordsRecords

Balance Balance SheetSheet

Income Income StatementStatement

Cash FlowCash Flow

Types of LiabilitiesTypes of Liabilities

Balance SheetBalance Sheet

Long-term LiabilitiesFinancial obligations that will take the

business more than one year to repay.Examples Include:

Mortgage - A loan for purchasing a building and or land.

Notes payable for large loan – Example include: money owed for loans to buy a company vehicle or large, expensive equipment

Financial Financial RecordsRecords

Balance Balance SheetSheet

Income Income StatementStatement

Cash FlowCash Flow

Types of LiabilitiesTypes of Liabilities

5 year

loan`

20 year loan`

Balance SheetBalance Sheet

Net Worth / Owner’s Equity– The monetary amount that a business owns

Assets – Liabilities = Net Worth

Net Worth / Owner’s Equity:• Contributed Capital• Retained Earnings

Financial Financial RecordsRecords

Balance Balance SheetSheet

Income Income StatementStatement

Cash FlowCash Flow

Fred’s House of Fun

April 1, 2008

Assets

Cash $10,745

Accounts receivable 868

Inventory 5,799

Supplies 433

Total Assets $17,845

¯¯¯¯¯¯¯

Liabilities

Accounts Payable $3,444

Notes Payable 5,705

Total Liabilities $ 9,149

Net Worth

Fred Flintstone 8,696

Total Liabilities & Net Worth $17,845

¯¯¯¯¯¯¯

Income Statement

Profit and Loss Statement

Compares revenue and expenses over a specific period of time to see if the business has made a profit

Introduction

Costs

Sources

Financial Records

Balance Sheet

Income Statement

Cash Flow

Income Statement

Gross Sales – The total sales (revenue) of a business before the cost of goods or expenses are deducted

GROSS SALES

- RETURNS

= NET SALES

Introduction

Costs

Sources

Financial Records

Balance Sheet

Income Statement

Cash Flow

Income Statement

Cost of Goods Sold – The total cost of all goods or services sold by a business during a specific period of time

Beginning Inventory

+ Purchases

- Ending Inventory

= Cost of Goods Sold

Introduction

Costs

Sources

Financial Records

Balance Sheet

Income Statement

Cash Flow

Income Statement

Depreciation – A tax adjustment made to certain fixed assets to account for the fact that they become less valuable with age

Introduction

Costs

Sources

Financial Records

Balance Sheet

Income Statement

Cash Flow

Income Statement

Straight Line Depreciation – The acquisition price minus the salvage price divided by the useful life of the product in years

Depreciation = (Cost-salvage Value)

Useful Life

Cost: $10,000Useful life: 8 yearsSalvage price: $2,000Depreciation = $1,000/year

Introduction

Costs

Sources

Financial Records

Balance Sheet

Income Statement

Cash Flow

Income Statement

Sales Ratio – An expression of any component of the income statement as a percentage of total sales

(Net Profit / Gross Sales) * 100%

Gross Sales = $47,000Net Profit = 12,050Sales Ratio = 25.6%

Introduction

Costs

Sources

Financial Records

Balance Sheet

Income Statement

Cash Flow

Income Statement

Sales Forecast – An estimate of sales, in dollars or units, for a specified period of time

Introduction

Costs

Sources

Financial Records

Balance Sheet

Income Statement

Cash Flow

Income Statement

Break-Even Point – The point at which the business begins to make a profit

Break Even Point = Total Fixed Costs (per unit)

Selling Price – Variable Costs(per unit) (per unit)

Introduction

Costs

Sources

Financial Records

Balance Sheet

Income Statement

Cash Flow

Statement of Cash Flows

Cash Flow – The flow of cash in and out of the business; measures changes in the cash a business will have available from month to month

Introduction

Costs

Sources

Financial Records

Balance Sheet

Income Statement

Cash Flow

Statement of Cash Flows

Cash Flow Formula

Beginning Cash Balance for Year 1

+ Cash Receipts

- Cash Disbursements

= Cash Flow (Balance) or Beginning Cash Balance for Year 2

Introduction

Costs

Sources

Financial Records

Balance Sheet

Income Statement

Cash Flow