M6 L1 Financial Documents Used in a Small Business


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M6 L1 Financial Documents Used in a Small Business

  1. 1. Financial Documents Used in a Small Business <ul><li>Balance Sheet </li></ul><ul><li>Income Statement </li></ul><ul><li>Statement of Cash Flows </li></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  2. 2. Understanding Financial Statements 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. Balance Sheet Income Statement Cash-Flow Statement
  3. 3. 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:
  4. 4. 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-Term Liabilities Shareholder’s Equity
  5. 5. 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
  6. 6. 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 A ccount s P ayable $ 25,000 Net Worth $100,000 TOTAL $125,000 The BALANCE SHEET is in balance with the addition of $25K that is owed to the vendor. It is place under current liabilities because it is due to be paid back within one year.
  7. 7. 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 $50,000 Total C/A $100,000 FIXED ASSETS Building $100,000 Total F/A $100,000 TOTAL $200,000 CURRENT LIABILITIES A ccount s P ayable $ 25,000 Total C/L $ 25,000 LONG TERM DEBT Mortgage $ 75,000 Total 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.
  8. 8. Balance Sheet <ul><li>A financial statement that shows: </li></ul><ul><ul><li>what a business owns </li></ul></ul><ul><ul><li>what it owes </li></ul></ul><ul><ul><li>how much it is worth at a particular point in time. </li></ul></ul><ul><li>Components include: </li></ul><ul><ul><li>Assets – what the business has of value </li></ul></ul><ul><ul><li>Liabilities – what the business owes </li></ul></ul><ul><ul><li>Net worth – what the business is worth </li></ul></ul>
  9. 9. Balance Sheet <ul><li>An analysis of what a business owns and owes at a certain point in time </li></ul><ul><li>BALANCE SHEET </li></ul><ul><li>FORMULA </li></ul><ul><li>Assets = Liabilities + </li></ul><ul><li>Net Worth </li></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  10. 10. Balance Sheet <ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  11. 11. Balance Sheet <ul><li>Types of Assets: </li></ul><ul><li>Fixed Assets – Items of monetary value that are not easily converted into cash: </li></ul><ul><ul><li>Equipment </li></ul></ul><ul><ul><li>Furniture, fixtures </li></ul></ul><ul><ul><li>Land </li></ul></ul><ul><ul><li>Buildings </li></ul></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  12. 12. Balance Sheet <ul><li>Types of Assets: </li></ul><ul><li>Current Assets – Items of monetary value that can be converted to cash within twelve months </li></ul><ul><ul><li>Cash </li></ul></ul><ul><ul><li>Inventory </li></ul></ul><ul><ul><li>Supplies </li></ul></ul><ul><ul><li>Accounts Receivable </li></ul></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  13. 13. Balance Sheet <ul><li>Intangible Assets </li></ul><ul><ul><ul><li>Items of value that the business owns that cannot be seen or touched. </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Copyright </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li> 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. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Patent </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li> A legal document that gives an inventor the sole right to produce, use, and sell an invention. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>  A patent lasts for 20 years. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Trademark </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>  A name, symbol, or special mark that, when registered, can be used only by a certain business. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Goodwill </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li> Customers' approval and support of a business. </li></ul></ul></ul></ul></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  14. 14. Balance Sheet <ul><li>Other Assets </li></ul><ul><li> - Cash Value of Insurance Policy </li></ul><ul><li>- Cash Value on retirement savings </li></ul><ul><li> (401K, IRA) </li></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  15. 15. Balance Sheet <ul><li>Liabilities – Debts owed by the business. </li></ul><ul><li>Current Liabilities </li></ul><ul><ul><li>Accounts Payable </li></ul></ul><ul><ul><li>Wages Payable </li></ul></ul><ul><li>Long-Term Liabilities </li></ul><ul><ul><li>Loans </li></ul></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  16. 16. Balance Sheet <ul><li>Current Liabilities </li></ul><ul><li>Financial obligations that will be repaid within one year. </li></ul><ul><li>Examples include: </li></ul><ul><ul><li>Accounts payable - Expenses that have been incurred but not yet paid. </li></ul></ul><ul><ul><li>Notes payable - small loans. Example include: money owed on loans for office furniture, landscaping </li></ul></ul><ul><ul><li>Salaries payable - Wages owed to employees </li></ul></ul><ul><ul><li>Income taxes payable - Monies due to the government </li></ul></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>Types of Liabilities
  17. 17. Balance Sheet <ul><li>Long-term Liabilities </li></ul><ul><li>Financial obligations that will take the business more than one year to repay. </li></ul><ul><li>Examples Include: </li></ul><ul><ul><li>Mortgage - A loan for purchasing a building and or land. </li></ul></ul><ul><ul><li>Notes payable for large loan – Example include: money owed for loans to buy a company vehicle or large, expensive equipment </li></ul></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>Types of Liabilities 5 year loan ` 20 year loan`
  18. 18. Balance Sheet <ul><li>Net Worth / Owner’s Equity – The monetary amount that a business owns </li></ul><ul><li>Assets – Liabilities = Net Worth </li></ul><ul><li>Net Worth / Owner’s Equity: </li></ul><ul><li>Contributed Capital </li></ul><ul><li>Retained Earnings </li></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  19. 19. 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 ¯¯¯¯¯¯¯ Balance Sheet
  20. 20. Income Statement <ul><li>Profit and Loss Statement </li></ul><ul><li>Compares revenue and expenses over a specific period of time to see if the business has made a profit </li></ul><ul><li>Introduction </li></ul><ul><li>Costs </li></ul><ul><li>Sources </li></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  21. 21. Income Statement <ul><li>Gross Sales – The total sales (revenue) of a business before the cost of goods or expenses are deducted </li></ul><ul><li>GROSS SALES </li></ul><ul><li>- RETURNS </li></ul><ul><li>= NET SALES </li></ul><ul><li>Introduction </li></ul><ul><li>Costs </li></ul><ul><li>Sources </li></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  22. 22. Income Statement <ul><li>Cost of Goods Sold – The total cost of all goods or services sold by a business during a specific period of time </li></ul><ul><li>Beginning Inventory </li></ul><ul><li>+ Purchases </li></ul><ul><li>- Ending Inventory </li></ul><ul><li>= Cost of Goods Sold </li></ul><ul><li>Introduction </li></ul><ul><li>Costs </li></ul><ul><li>Sources </li></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  23. 23. Income Statement <ul><li>Depreciation – A tax adjustment made to certain fixed assets to account for the fact that they become less valuable with age </li></ul><ul><li>Introduction </li></ul><ul><li>Costs </li></ul><ul><li>Sources </li></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  24. 24. Income Statement <ul><li>Straight Line Depreciation – The acquisition price minus the salvage price divided by the useful life of the product in years </li></ul><ul><li>Depreciation = </li></ul><ul><li>(Cost-salvage Value) </li></ul><ul><li>Useful Life </li></ul><ul><li>Cost: $10,000 </li></ul><ul><li>Useful life: 8 years </li></ul><ul><li>Salvage price: $2,000 </li></ul><ul><li>Depreciation = $1,000/year </li></ul><ul><li>Introduction </li></ul><ul><li>Costs </li></ul><ul><li>Sources </li></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  25. 25. Income Statement <ul><li>Sales Ratio – An expression of any component of the income statement as a percentage of total sales </li></ul><ul><li>(Net Profit / Gross Sales) * 100% </li></ul><ul><li>Gross Sales = $47,000 </li></ul><ul><li>Net Profit = 12,050 </li></ul><ul><li>Sales Ratio = 25.6% </li></ul><ul><li>Introduction </li></ul><ul><li>Costs </li></ul><ul><li>Sources </li></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  26. 26. Income Statement <ul><li>Sales Forecast – An estimate of sales, in dollars or units, for a specified period of time </li></ul><ul><li>Introduction </li></ul><ul><li>Costs </li></ul><ul><li>Sources </li></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  27. 27. Income Statement <ul><li>Break-Even Point – The point at which the business begins to make a profit </li></ul><ul><li>Break Even Point = Total Fixed Costs (per unit) </li></ul><ul><li>Selling Price – Variable Costs </li></ul><ul><li>(per unit) (per unit) </li></ul><ul><li>Introduction </li></ul><ul><li>Costs </li></ul><ul><li>Sources </li></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  28. 28. Statement of Cash Flows <ul><li>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 </li></ul><ul><li>Introduction </li></ul><ul><li>Costs </li></ul><ul><li>Sources </li></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>
  29. 29. Statement of Cash Flows <ul><li>Cash Flow Formula </li></ul><ul><li>Beginning Cash Balance for Year 1 </li></ul><ul><li>+ Cash Receipts </li></ul><ul><li>- Cash Disbursements </li></ul><ul><li>= Cash Flow (Balance) or Beginning Cash Balance for Year 2 </li></ul><ul><li>Introduction </li></ul><ul><li>Costs </li></ul><ul><li>Sources </li></ul><ul><li>Financial Records </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow </li></ul></ul>