unit 3 financial analysis. unit 3 vocabulary accounting period accounts payable accounts receivable...

Unit 3Financial Analysis

Unit 3 Vocabulary Accounting Period Accounts Payable Accounts Receivable Accrual Basis Angel Assets Balance Sheet Bootstrapping Budget Calendar Year Capacity Capital

Capital Expenditures Cash Basis Cash Flow Character Chart of Accounts Collateral Comparative Financial

Statement Conditions Contingency Fund Credit Bureaus Credits

Unit 3 Vocabulary Current Assets Current Ratio Debt Capital Debits Due Diligence Equity Equity Capital Factor Financial Reports Fiscal Year Fixed Assets Fixed Expenses

GAAP General Journal General Partner Income Statement Initial Public Offering

(IPO) Journal Journalizing Liabilities Net Profit on Sales Ratio Operating Capital Operating Ratio

Unit 3 Vocabulary Owner’s Equity Posting Private Placement Pro forma Quick Ratio Ratio Analysis Risk Capital Statement of Cash Flows Stock Subchapter S Corporation Trade Credit Variable Expenses

Venture Capital Venture Capitalists Working Capital

Unit 3 EssentialUnit 3 EssentialQuestion 1Question 1

(MKT-EN-4)(MKT-EN-4)

What information is needed to What information is needed to compile a business plan compile a business plan worksheet?worksheet?

Essential Question 1AEssential Question 1A(MKT-EN-4G)(MKT-EN-4G)

What are the sources of capital What are the sources of capital available to entrepreneurs?available to entrepreneurs?

Start up FinancingStart up Financing Sources of FinancingSources of Financing

Equity CapitalEquity Capital: Cash raised for a business in : Cash raised for a business in exchange for an ownership stake in the exchange for an ownership stake in the business or business or equityequity..

Risk CapitalRisk Capital: (Equity funding) money : (Equity funding) money invested in companies where there is invested in companies where there is financial risk.financial risk.

Sources of Equity FinancingSources of Equity Financing:: Personal SavingsPersonal Savings Friends and FamilyFriends and Family Private InvestorsPrivate Investors PartnersPartners Venture CapitalistsVenture Capitalists Government-sponsored venture capital fundsGovernment-sponsored venture capital funds


Debt CapitalDebt Capital: Money raised by taking out : Money raised by taking out loans.loans.

Sources of Debt FinancingSources of Debt Financing:: Banks and Credit UnionsBanks and Credit Unions Trade CreditTrade Credit Minority Enterprise Development ProgramsMinority Enterprise Development Programs Commercial Finance CompaniesCommercial Finance Companies SBA LoansSBA Loans Small Business Investment Companies (SBICs)Small Business Investment Companies (SBICs)

Essential Question 1BEssential Question 1B(MKT-EN-4H)(MKT-EN-4H)

How do the sources of capital How do the sources of capital compare and contrast?compare and contrast?


Equity CapitalEquity Capital Advantage: Advantage: Money does not have to be paid Money does not have to be paid

back even if business failsback even if business fails Disadvantage: Disadvantage: You are giving up a You are giving up a

percentage of ownership and/or control and percentage of ownership and/or control and profitprofit

Debt CapitalDebt Capital:: Advantage: Advantage: You maintain ownership, control You maintain ownership, control

and profitsand profits Disadvantage: Disadvantage: Money has to be paid back Money has to be paid back

even if business failseven if business fails

Unit 3 EssentialUnit 3 EssentialQuestion 2Question 2

(MKT-EN-7)(MKT-EN-7)

What are the processes, What are the processes, strategies, and systems needed strategies, and systems needed to guide the financial to guide the financial organization of an organization of an entrepreneurial entity?entrepreneurial entity?

Essential Question 2AEssential Question 2A(MKT-EN-7A)(MKT-EN-7A)

What are the fixed and variable What are the fixed and variable costs for start up and costs for start up and maintenance of a business?maintenance of a business?

Start up FinancingStart up Financing Start up CostsStart up Costs

Fixed ExpensesFixed Expenses: Expenses that do not : Expenses that do not change with the number of units produced.change with the number of units produced.

RentRent LoansLoans InsuranceInsurance Management SalariesManagement Salaries PromotionPromotion

Start up FinancingStart up Financing Start up CostsStart up Costs

Variable ExpensesVariable Expenses: Expenses that change : Expenses that change with the number of units produced.with the number of units produced.

SuppliesSupplies UtilitiesUtilities Worker wages / CommissionWorker wages / Commission Production materialsProduction materials MaintenanceMaintenance TransportationTransportation All operating expensesAll operating expenses

Essential Question 2BEssential Question 2B(MKT-EN-7B)(MKT-EN-7B)

What are the terms used in What are the terms used in financial reports?financial reports?

Financial TermsFinancial Terms DefinitionsDefinitions

AssetsAssets: Items of value that belong to a : Items of value that belong to a business or individual.business or individual.

LiabilitiesLiabilities: Monies owed to others.: Monies owed to others. EquityEquity: Ownership or investment.: Ownership or investment. LiquidityLiquidity: The ease of converting assets to : The ease of converting assets to

cash. Items with high liquidity are savings, cash. Items with high liquidity are savings, stocks, mutual funds, etc. Items with low stocks, mutual funds, etc. Items with low liquidity are houses, equipment, etc.liquidity are houses, equipment, etc.

SolvencySolvency: Measure of indebtedness. If : Measure of indebtedness. If assets are greater than liabilities then you are assets are greater than liabilities then you are solvent. If liabilities are greater than assets solvent. If liabilities are greater than assets then you are insolvent.then you are insolvent.

Financial TermsFinancial Terms DefinitionsDefinitions

Ratio AnalysisRatio Analysis: The comparison of two or : The comparison of two or more amounts on a financial statement and more amounts on a financial statement and the evaluation of the relationship between the evaluation of the relationship between them.them.

Current AssetsCurrent Assets: Cash or any other item that : Cash or any other item that can be converted to cash quickly and used can be converted to cash quickly and used within a year.within a year.

Current LiabilitiesCurrent Liabilities: Debts due within a year.: Debts due within a year.

Financial TermsFinancial Terms Ratio AnalysisRatio Analysis

Current RatioCurrent Ratio Obtained from the balance sheet.Obtained from the balance sheet. Indicates the ability of a business to pay its bills.Indicates the ability of a business to pay its bills. Is measured by:Is measured by:

A ratio of 2:1 or higher is good.A ratio of 2:1 or higher is good.

sLiabilitieCurrent

AssetsCurrent


Working CapitalWorking Capital Obtained from the balance sheet.Obtained from the balance sheet. Indicates the capital available to carry out daily Indicates the capital available to carry out daily

operations.operations. Is measured by: Current Assets – Current Is measured by: Current Assets – Current

LiabilitiesLiabilities Amount of working capital needed is determined Amount of working capital needed is determined

by industry average.by industry average.


Debt RatioDebt Ratio Obtained from the balance sheet.Obtained from the balance sheet. Indicates the solvency of a business.Indicates the solvency of a business. Is measured by:Is measured by:

A ratio of 50% to 75% is good for business operation. A ratio of 50% to 75% is good for business operation. This indicates the majority of the business is financed This indicates the majority of the business is financed by creditors and provides a negative incentive for by creditors and provides a negative incentive for takeovers.takeovers.

A ratio of 40% or less is required for a business or A ratio of 40% or less is required for a business or personal loan.personal loan.

Assets Total

sLiabilitie Total


Net Profit on SalesNet Profit on Sales Obtained from the income statement.Obtained from the income statement. Indicates the amount of money left from each dollar Indicates the amount of money left from each dollar

derived from sales.derived from sales. Is measured by:Is measured by:

Amount of net profit on sales is determined by Amount of net profit on sales is determined by industry average.industry average.

If net profit on sales is lower than industry average, it If net profit on sales is lower than industry average, it may indicate that prices are too low or costs are too may indicate that prices are too low or costs are too high.high.

SalesNet

safter taxe incomeNet


Operating RatioOperating Ratio Obtained from the income statement.Obtained from the income statement. Indicates the relationship between an expense and sales.Indicates the relationship between an expense and sales. Each expense is measured separately.Each expense is measured separately. Is measured by:Is measured by:

Amount of operating ratio is determined by industry Amount of operating ratio is determined by industry average.average.

If your percentage is higher than the industry average, it If your percentage is higher than the industry average, it could be an indicator that you are spending too much in could be an indicator that you are spending too much in that expense area.that expense area.

Sales

Expense


Quick RatioQuick Ratio Obtained from the balance sheet.Obtained from the balance sheet. Indicates the liquidity of a business without relying Indicates the liquidity of a business without relying

on inventory.on inventory. Is measured by:Is measured by:

Amount of quick ratio is determined by industry Amount of quick ratio is determined by industry average.average.

sLiabilitieCurrent

Inventory - AssetsCurrent


Return on Equity (ROE)Return on Equity (ROE) Obtained from the balance sheet and income Obtained from the balance sheet and income

statement.statement. Indicates the amount of money earned for each Indicates the amount of money earned for each

dollar invested.dollar invested. Is measured by:Is measured by:

Amount of ROE is determined by industry average.Amount of ROE is determined by industry average.

Equity sOwner' Total

IncomeNet

Essential Question 2CEssential Question 2C(MKT-EN-7C)(MKT-EN-7C)

What are the various elements What are the various elements needed for a tentative budget for needed for a tentative budget for a business including an income a business including an income statement, balance sheet, and statement, balance sheet, and cash flow statement?cash flow statement?

Financial Financial StatementsStatements

BudgetBudget:: A formal, written A formal, written statement of expected revenue statement of expected revenue and expenses for a future period and expenses for a future period of time. It will include a of time. It will include a projected (projected (pro formapro forma) income ) income statement, cash flow statement, statement, cash flow statement, and balance sheet.and balance sheet.

The Income The Income StatementStatement

Income StatementIncome Statement:: A A summary of the business’s summary of the business’s revenue and expenses and is revenue and expenses and is used to calculate Net Income or used to calculate Net Income or Loss.Loss.


Total SalesTotal Sales- Returns and AllowancesReturns and Allowances

= Net Sales= Net Sales- Cost of goods SoldCost of goods Sold

= Gross Profit= Gross Profit- Operating ExpensesOperating Expenses

= Net Income from Operations= Net Income from Operations

+ Other Income+ Other Income- Other ExpensesOther Expenses

= Net Profit Before Taxes= Net Profit Before Taxes- Income TaxesIncome Taxes

= Net Profit (Loss)= Net Profit (Loss)


Cost of Goods Sold is calculated Cost of Goods Sold is calculated by:by:

Beginning InventoryBeginning Inventory

+ + PurchasesPurchases

= Goods Available for Sale= Goods Available for Sale- Ending InventoryEnding Inventory

= Cost of Goods Sold= Cost of Goods Sold

The Balance SheetThe Balance Sheet Balance sheetBalance sheet:: A summary of a business’s A summary of a business’s

assets, liabilities, and owner’s equity.assets, liabilities, and owner’s equity. Assets = Liabilities + Owner’s EquityAssets = Liabilities + Owner’s Equity A balance sheet consists of:A balance sheet consists of:

Current assetsCurrent assets: : Cash or any other item that can be Cash or any other item that can be converted to cash quickly and used within a year.converted to cash quickly and used within a year.

Fixed assetsFixed assets: : Items that will be held for more than a Items that will be held for more than a year. (Automobiles, equipment, buildings, etc)year. (Automobiles, equipment, buildings, etc)

Current liabilitiesCurrent liabilities: : Debts due within a year.Debts due within a year. Long-term liabilitiesLong-term liabilities: : Debts that will not be paid off Debts that will not be paid off

within the year.within the year. Owner’s EquityOwner’s Equity: : The value or worth of the business.The value or worth of the business.

Cash Flow Cash Flow StatementStatement

Cash FlowCash Flow: : The amount of cash The amount of cash available at any time.available at any time.

Cash Flow StatementCash Flow Statement:: A report of A report of how much cash a business took in how much cash a business took in and where the cash went.and where the cash went.

Cash Flow also helps you see if you Cash Flow also helps you see if you will have enough money when you will have enough money when you need to pay your bills.need to pay your bills.

Essential Question 2DEssential Question 2D(MKT-EN-7D)(MKT-EN-7D)

What are the various tax What are the various tax liabilities?liabilities?

Laws that Affect TaxesLaws that Affect Taxes Sales Taxes:Sales Taxes: Percentage of the price of Percentage of the price of

an item that goes to a state or local an item that goes to a state or local government.government.

Federal Unemployment Tax:Federal Unemployment Tax: The The Federal Unemployment Tax Act (FUTA) Federal Unemployment Tax Act (FUTA) requires employers to pay 6.2% of their requires employers to pay 6.2% of their employee’s gross pay as insurance for employee’s gross pay as insurance for workers who are temporarily out of work.workers who are temporarily out of work.

Laws that Affect TaxesLaws that Affect Taxes State Unemployment Tax:State Unemployment Tax: The State The State

Unemployment Tax Act (SUTA) requires Unemployment Tax Act (SUTA) requires employers to pay a percentage (varies with employers to pay a percentage (varies with the state – 2.7% on the first $8500 with step the state – 2.7% on the first $8500 with step decreases depending on hiring/firing history decreases depending on hiring/firing history in Georgia) of their employee’s gross pay for in Georgia) of their employee’s gross pay for workers who are temporarily out of work.workers who are temporarily out of work.

Business Income Taxes:Business Income Taxes: Your Your business’s legal status regulates the business’s legal status regulates the amount of local, state, and federal amount of local, state, and federal income taxes paid.income taxes paid.

Laws that Affect TaxesLaws that Affect Taxes Other Business Taxes: Other Business Taxes: Depending on the Depending on the

business, there may be other local, state, business, there may be other local, state, and/or federal taxes.and/or federal taxes. Environmental taxesEnvironmental taxes Communication and air transportation taxesCommunication and air transportation taxes Fuel taxesFuel taxes First retail sale on heavy trucks, trailors and tractorsFirst retail sale on heavy trucks, trailors and tractors Manufactures taxes on the sale and use of a variety Manufactures taxes on the sale and use of a variety

of different articlesof different articles There is a federal excise tax on certain trucks, truck There is a federal excise tax on certain trucks, truck

tractors, and buses used on public highwaystractors, and buses used on public highways Businesses that accept wagers or conduct a Businesses that accept wagers or conduct a

wagering pool or lotterywagering pool or lottery

Laws that Affect TaxesLaws that Affect Taxes

Payroll Taxes:Payroll Taxes: Federal Insurance Contributions Act Federal Insurance Contributions Act

of 1935of 1935 (FICA)(FICA):: Established the Social Established the Social Security Tax.Security Tax.

Is 13% of the employee’s gross pay.Is 13% of the employee’s gross pay.» Employee pays 6.5%.Employee pays 6.5%. » Employer pays 6.5%.Employer pays 6.5%.» If you are self-employed you are considered both the If you are self-employed you are considered both the

employer and employee and are required to pay the employer and employee and are required to pay the full 13%.full 13%.

Laws that Affect TaxesLaws that Affect Taxes

Medicare TaxMedicare Tax Is 2.9% of the employee’s gross pay.Is 2.9% of the employee’s gross pay.

» Employee pays 1.45%.Employee pays 1.45%. » Employer pays 1.45%.Employer pays 1.45%.» If you are self-employed you are considered both the If you are self-employed you are considered both the

employer and employee and are required to pay the employer and employee and are required to pay the full 2.9%.full 2.9%.

unit 3 financial analysis. unit 3 vocabulary accounting period accounts payable accounts receivable...

Documents

capital slide

sources of capital available

sources of capital compare

sources of equity financing

profit debt capital

sources of debt financing

capital operating ratio

equity funding money