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

1. Income Statement

2. Cash Flow Statement

3. Balance Sheet

Purpose of an Income Statement

The Income Statement

Prepared at the end of each month

Tracks income and expenses

Also called a profit and loss statement

Figures Included on 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

Example of an Income Statement

Income Statement The Math

Sales $100 (25 ties × $4 per tie = $100)

less Total Cost of Goods Sold

$50 (25 ties × $2 per tie = $50)

Gross Profit $50 ($100 - $50 = $50)

less Operating Costs

Fixed Costs $24 ($24 for flyers)

Variable Costs $0

Profit Before Taxes $26 ($50 - $24 = $26)

Taxes $6

Net Profit $20 ($26 - $6 = $20)

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.

Figures Included on an Income Statement

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.

Income Statement for Lola’s Custom Draperies, Inc.March 1999

Sales $85,456

100%

Cost of Goods Sold Materials Labor

11,550

17,810

less Total Cost of Goods Sold

$29,360

($11,550 + $17,810) 34%

Gross Profit $56,096

($85,456 - $29,360) 65.6%

Operating Costs Fixed Costs Factory Rent & Utilities Salaries & Admin Depreciation Variable Costs Sales Commissions

$ 8,000

12,000

2,000

8,000

less Total Operating Costs

$30,000

($8,000 + 12,000 + 2,000 + 8,000)

35%

Profit Before Taxes $26,096

($56,096 - $28,000) 30%

Taxes (25%) 6,524

($26,096 x 0.25) 7.6%

Net Profit / Loss $19,572

($26,096 - $6,524) 22.9%

ExampleIncome Statement for a Fast-Food

Restaurant

Sales $2,600,000

100%

Cost of Goods Sold Food Paper Products

$792,000108,000

less Total Cost of Goods Sold

$900,000 35%

Gross Profit $1,700,000

65%

less Total Operating Costs

$1,000,000

38%

Profit $700,000 27%

Taxes (33%) $233,000 9%

Net Profit $467,000 18%

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

Significance of Break-Even point

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 ]

Purpose of & Figures Included on a Cash Flow Statement

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

1. All sources of cash that come into the business with actual dates they are received (receipts)

2. Cash outflows that must be made within the month (disbursements)

3. Net change in cash flow before and after taxes

Purpose of & Figures Included on a Balance Sheet

The Balance Sheet

Prepared at the end of the business’s fiscal year

Usually October 1 to September 30

Based on the Financial Equation

1. Assets – all items of worth owned by the business

2. Liabilities – all debts owed by the business

3. Owner’s Equity – also called capital or net worth; amount left over after liabilities are subtracted from assets

The Financial Equation

Assets – Liabilities = Owner’s Equity

Example of a Balance Sheet

Hometown Restaurant – Balance Sheet, January 1999

Assets Liabilities

Cash $10,000

Loan (for stove)

$5,000

Tables & Chairs 3,000 Owner’s Equity 11,900

Stove 5,000 ($10,000 cash + 3,000 tables & chairs - $1,100 depreciation)

Subtotal $18,000

less Depreciation

1,100

Total Assets $16,900

Total Liabilities $16,900

Closing Task

1) Describe an income statement – what is its purpose and what is included?

2) Describe a cash flow statement – what is its purpose and what is included?

3) Describe the balance sheet – what is its purpose and what is included?

4) Write the financial equation. How does it relate to the balance sheet?

5) Why should business owners complete a Break-Even Analysis?

Understanding a Balance Sheet Activity

Understanding a Balance Sheet Activity

Liabilities

Accts Pay. – Topline

Assets

Cash Accts Rec. –

Dean Mills Supplies Insurance

Owner’s Equity

Owner’s Capital Expense? Investment? Revenue? Withdrawal?