This document discusses financial statements and how they relate to entrepreneurial businesses. It provides definitions for key financial terms like assets, liabilities, equity, income statement, balance sheet, and cash flow statement. It explains the purpose and components of various financial statements. The document also discusses financial analysis metrics for evaluating a company's profitability, solvency, and efficiency.

1. Entrepreneur at the
Controls
UNDERSTAND, ANALYZE AND EXPLAIN
FINANCIAL STATEMENTS AND HOW THEY
RELATE TO AN ENTREPRENEURIAL BUSINESS
Bob Dickson
Dickson Consulting
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2. Entrepreneur
Entrepreneur
NOUN
A person who organizes and operates
a business or businesses, taking on
greater than normal financial risks in
order to do so.
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3. Issues of Concern to
Entrepreneurial Companies
Use of financial statements to demonstrate growth and strength of the
entity.
Utilization if financial statements by the whole management team to
measure results and improve operations. Involvement of financial staff in
interpreting operating results for management team.
Complexity and cost of financial reporting. Meaningfulness and usefulness
of complying with complex financial reporting requirements.
Complex accounting issues such as revenue recognition.
Need for cash and fundraising issues.
Communication with outsiders and users of financial statements to enhance
trust in management.
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4. Responsibility of Board and CEO-
Fly the Plane
Instrument panel data=Record keeping and accounting system.
Instrument panel standards=Generally Accepted Accounting
Principles (GAAP) to ensure instrument panels work the same.
Instrument panel calibration=Auditing. Making sure the instrument
panel is functioning as intended.
Instrument panel readings=Financial reporting. What are the
readings on the instrument panel.
GPS=Financial forecasting. Where are we headed?
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5. Responsibilities?
CEO=Fly the plane!
COO=Copilot
Accounting staff=Build and maintain the accounting
system control panel
Regulatory bodies=Standard creation
Auditors=Internal and external auditing
Financial staff=Financial reporting
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6. Financial Reporting vs.
Management Reporting
Financial reporting is primarily concerned with
the recording & reporting of economic data and
activities for a business to external parties.
The goal of financial reporting is to provide
useful information for decisions. For
information to be useful, it must be trusted.
This demands ethics in financial reporting.
Ethics are beliefs that distinguish right from
wrong.
Managerial accounting uses both financial
accounting and estimated data to aid management in
running day-to-day operations and in planning future
operations.
Historical information needs to be accurate to
provide a solid base but estimates and assumptions
are necessary to plan for future events and
operations.
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7. Accounting Principles
Accounting is an information and measurement
system that identifies, records, and communicates
relevant, reliable, and comparable information about an
entities business activities. An accounting system
supports the financial reporting process.
GAAP – Generally Accepted Accounting Principles. These
are the rules that govern how businesses record and
report financial transactions.
FASB – Financial Accounting Standards Board. This body
is the major one responsible for preparing GAAP for
reporting in the United States.
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8. Key Financial Statements
Statement of Position or Balance Sheet
Income Statement or Statement of Operations
Statement of Cash Flow
Statement of Owners’ Equity and Retained
Earnings
Footnotes to Financial Statements
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9. Balance Sheet
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The purpose of the balance sheet is to report the financial position of an accounting entity at a particular point in time. It
reflects an entities assets, liabilities and net equity at a point in time, usually as of the end of a month and year. It reports
is owned, owed and the residual interest.
Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions
events. Examples include cash, accounts receivable, inventory, buildings and equipment. For example, if an entity has a
that made computers, then it would be considered an asset because the factory would produce cars that would be sold in
market for cash.
Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular
to transfer assets or provide services to other entities in the future as a result of past transactions or events.
Examples are debt, accounts payable, unearned revenues and bonds payable.
Equity is the residual balance. Assets – liabilities = equity. Equity is commonly called stockholders’ equity if the
a corporation as it represents the financing provided by the stockholders along with the earnings from the business
paid out as dividends (retained earnings).

10. Balance Sheet-Overview of
Condensed Balance Sheet
There are generally five sections of a balance sheet:
Current assets
Noncurrent assets
Current liabilities
Long-term and other liabilities
Shareholders’ equity
Current assets plus noncurrent assets less current liabilities less
noncurrent liabilities equals shareholders equity. Total assets less
total liabilities equals shareholders equity.
All transactions are recorded at historical cost. Historical cost is
assumed to represent the fair market value of the item at the date of
the transaction because it reflects the actual use of resources by
independent parties.
10
As of
xx xx,
xx20
As of
xx, xx
xx20
Current
assets
Current
liabilities
Noncurrent
assets
Noncurrent
Liabilities
Shareholders’
equity
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11. Types of Assets and Liabilities
Assets
There are two different types of assets shown on a
balance sheet-current assets and non-current assets
Current assets are assets that will be used or turned
into cash within one year. Examples include cash,
accounts receivable, inventory, short-term
investments, supplies and prepaids.
Non-current assets comprise the remainder of the
assets. These include accounts such as long-term
investments, land, building, equipment, patents and
intangible assets.
Liabilities
There are two different types of liabilities shown on a
balance sheet–current liabilities and long-term liabilities.
Current liabilities are obligations that will be paid in cash (or
other services) or satisfied by providing services within the
coming year. Examples include accounts payable, short-term
notes payable, and taxes payable
Long-term liabilities are obligations that will satisfied after
one year. Examples include long-term debt and deferred
taxes.
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12. Balance Sheet-Current Assets
Summarizes cash and liquid assets that are intended to be converted into cash with one year.
Items owned by an entity, obligations payable to the entity and prepaid expenses.
12
As of xx xx, xx20
Cash and cash equivalents
Accounts receivable
Inventory
Prepaid expenses and other current assets
Total current assets
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13. Balance Sheet-Noncurrent
Assets
Summarizes assets that are not intended to be converted into cash within a year.
Tangible assets used in the business over several years such as facilities and
equipment. Tangible asset costs are “depreciated” (or written off as expense) over
the period of time that they are intended to be used. Several methods of
depreciation exist.
Intangible assets benefit the entity over time such as goodwill, capitalized research
& development expenses. Intangible assets are generally “amortized” (or written
off to expense) over the period of time that they benefit the entity. Annual or
periodic assessments are performed to evaluate the continuing value of intangible
assets.
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14. Balance Sheet-Example of
Noncurrent Assets
14
As of xx
xx, xx20
Property, plant and equipment, net of depreciation
Goodwill and other intangible assets, net of amortization
Other noncurrent assets
Total noncurrent assets
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15. Balance Sheet-Current
Liabilities
Liabilities or obligations of an entity tat are intended to be paid within one year.
Trade accounts payable, payroll and payroll taxes, taxes and other liabilities of the entity.
15
xx xx,
xx20
Trade accounts payable
Compensation expenses and taxes
Income taxes
Other current liabilities
Total current liabilities
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16. Balance Sheet-Noncurrent
Liabilities
Liabilities and obligations intended to be paid or satisfied by the entity after one year.
Long-term debt, deferred expenses.
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As of xx xx, 20xx
Long-term debt
Deferred taxes
Other non-current liabilities
Total long-term liabilities
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17. Balance Sheet-Shareholders
Equity
Summarizes original investment in entity, accumulated net income or losses and other non-operating
items.
It is not intended to represent the value of the entity.
17
As of xx xx ,
20xx
Common stock
Preferred stock
Retained earnings
Other
Total shareholders equity
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18. Income Statement or
Statement of Operations
The Income Statement reports a businesses performance for the period.
Probably the most focused on financial statement because the bottom line
is net income or loss reflecting the overall current results of operations.
Starts with revenue which indicates market and sales support of the
entities' products and services.
Deducts cost of goods or services resulting in a subtotal for “gross profit or
margin”. Gross profit is an important metric because it demonstrates the
amount of product profitability that is available to cover other expenses,
that are more fixed or semi-fixed.
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19. Income Statement or
Statement of Operations
A simple format for an income statement is:
Revenues – Expenses = Net Income
Revenues are earned for the sale of goods or services. Note that revenues occur when
the customer requirements are satisfied. The payment may or may not have been
received.
Expenses are incurred when a business receives goods and services. Like revenues,
payment may or may not have been made.
Cost of goods sold represents the expense a business incurred to buy or make a product
for resale.
Operating expenses are the usual expenses incurred in operating a business.
Non-operating items are revenue, expenses, gains and losses that do not relate to the
company’s primary operations.
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20. Example of an Income Statement
or Statement of OperationsPeriod Ended
xx/xx/20xx
Period Ended
xx/xx/20xx
Revenue $1,000,000 $750,000
Cost of Sales 250,000 200,000
Gross Margin 750,000 500,000
Selling Expenses 175,000 100,000
Administration and General Expenses 125,000 100,000
Research and Development Expenses 25,000 40,000
Depreciation and Amortization of Intangibles 15,000 15,000
Net Income Before Income Taxes 310,000 245,000
Income Tax Expenses 100,000 75,000
Net Income $210,000 $170,000
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21. Statement of Cash Flow
Reconciles cash from the beginning of the period to the end of the period.
Reports the amount of cash collected and paid out by a company in operating, investing and financing activities for a period of time. Details
sources and uses of cash.
Three major sources/uses of cash:
o Cash flow from operations
o Cash flow from financing activities
o Cash from investing activities
Operating activities – Transactions and events that enter into the determination of net income. The cash flows from operating activities section
reports a summary of cash receipts and cash payments from operations.
Investing activities – Transactions and events that involve the purchase and sale of securities, property, plant, equipment, and other assets not
generally held for resale. The cash flows from investing activities section reports the cash transactions for the acquisition and sale of relatively
permanent assets.
Financing activities – Transactions and events whereby resources and obtained from, or repaid to, owners and creditors. The cash flows from
financing activities section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the
owner.
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22. Cash is King!
Cash flow is of utmost importance to entrepreneurial companies!
•Start-up expenses can be significant.
•Product development costs are a necessary investment.
•Legal costs, particularly for patents, are expensive protection.
•Cost of facilities and people for infrastructure.
•Commercialization is an ongoing effort.
Debt financing is difficult to obtain.
Cost of financial reporting adds to the need for cash but it is worth the
investment.
•Part of business operations infrastructure.
•Creation of a reliable scorecard.
•Enhances creditability.
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23. Statement of Cash Flow-Cash Provided
by/Used for Operations
23
The statement of cash flow. Begins with net income or loss from the statement of
operations.
Adds and subtracts noncash items in the statement of operations:
oAdd back depreciation and amortization expense that is deducted from
statement of operations. Cash impact is recognized in investment section when
asset is acquired.
oAdd or subtract net changes in current asset and current liability categories on
balance sheet-accounts receivable, inventory, accounts payable, income taxes
payable, etc.,
oAdd or subtract net change in accrued liabilities. These are recognized as
expenses in statement of operations even though the cash has not been
expended during the period. Impact is to recognize accruals paid from previous
period net of new accruals for the current period.
Results in cash provided by or used by operations.
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24. Overview of Statement of Cash
Flow-Provided By Operations
24
XX Months
xx xx. 2020 Comment
Net income (loss) from operations $100,000 Positive or negative
Noncash items in statement of operations
Depreciation and amortization 10,000 Expense added back
Deferred income tax expense 5,000 Expense added back
Changes in working capital items (net) (5,000) Addition or subtraction
Cash flow provided by or used for operations 110,000 Total of above
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25. Example of Statement of Cash Flows
from Investing and Financing Activities
25
Cash flows from investing activities:
Purchases of equipment and furniture (10,000)-
License, patent and trademark fees (5,000)
Cash used in investing activities (15,000)
Cash flows from financing activities:
Proceeds from issuances of convertible debt 25.000
Proceeds from issuances of common stock 100,000 -
Cash flow from financing activities 125,000
Net change in cash 110,000
Cash, beginning of period 10,000
Cash, end of period $120,000
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26. Statement of Owners’ Equity and
Retained Earnings
Reflects net activity of entity since it’s inception which is the cumulative activity reflected in
historical financial statements.
Does not represent the market value of the entity. Residual interest in the assets of an entity
that remains after deducting its liabilities. In a business enterprise, the equity is the
ownership interest.
Contributed capital + Retained earnings=Total stockholders’ equity
Amount invested or contributed capital. Contributed capital is the amount of cash (or other
assets) provided by the shareholders. Common Stock and Additional Paid in Capital are
accounts in this section
Accumulated net income or losses or retained earnings. Retained earnings is the total
earnings that have not been distributed to owners as dividends
Beginning balance of retained earnings + Net income – Dividends=Ending balance of
retained earnings
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27. Example of a Statement of Owners’
Equity and Retained Earnings
xx, xx 20xx Comment
Common stock $100,000 Total issuances since inception of entity, at par
Preferred stock
50,000 Total issuances since inception of entity, at par
Additional paid in capital 500,000 Amount for above issuances, over par
Retained earnings 1,000,000
Beginning balance of retained earnings + Net
income – Dividends=Ending balance of
retained earnings
Total Entity Equity $1,650,000 Total of above
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28. Purposes of Financial Analysis
Profitability-measures of results of operations to provide:
-Returns to shareholders and dividends
-Financial rewards to attract and retain personnel
-Growth capital for future investment
pursuit of financing opportunities
Solvency-measures of ability to meet obligations. Generally
focused on balance sheet assets vs. obligations.
-Ability to satisfy bank and other creditor obligations
-Confidence of customers in long-term prospects for
company.
-Confidence of vendors to supply services and products.
Efficiency-measures of the efficiency of strategy and
execution.
-Continuous improvement of operations
-Comparable analysis of business performance to
other companies.
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29. Financial Analysis-Profitability
Gross margin percentage=gross margin divided by net sales (revenue). Important ratio
since it indicates as revenue grows how much profit will be generated to cover fixed
and semi-fixed operating expenses.
Operating margin percentage=operating income divided by net sales (revenues).
Indication of performance from operations.
Net margin percentage=net income divided by net sales (revenue). Overall
performance, after income tax expense.
Effective income tax rate=income taxes divided by net income before taxes. Indicates
effective Federal, state and local tax burden as a percentage of net income.
EBITDA
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30. EBITDA
EBITDA=Earnings Before Interest, Taxes, Depreciation and
Amortization
Start with net income and add back interest expense, income
tax expense, depreciation expense and amortization
expense recorded in the income statement.
Intent is to quantify earnings that relate to current
operations that may be comparable to other companies.
Multiple of EBITDA frequently used to estimate the value of a
company, Used in merger and acquisition discussions, stock
analysis, etc..
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31. EBITDA Calculation
31
Net income
Plus interest expense
Plus income tax expense
Plus depreciation
Plus amortization
= EBITDA
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32. Financial Statement Analysis-
Solvency
Quick Ratio=current assets-inventory/divided by liabilities. Also called the acid test
ratio. Indicative of short-term ability to use assets to satisfy current liabilities.
Current Ratio=current assets divided by current
liabilities. Includes inventory that will be turned into cash.
Debt to Equity Ratio=short-term debt plus long-term debt
divided by shareholders equity.
Debt Service Coverage Ratio=EBITDA divided by annual principal plus interest
payments. Measure for lenders to determine whether an entity can make debt
payments. A higher ratio is favorable. A lower ratio indicates an entity could have
problems meeting its debt obligations.
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33. Financial Statement Analysis-Efficiency
Accounts receivable turnover=average accounts receivable for a period divided by the net credit sales or revenues for the same period.
Measures how efficiently an entity collects accounts on credit extended.
Days sales (revenue) in accounts receivable=accounts receivable divided by total credit sales in the accounting period times days in accounting
period or average accounts receivable divided by average daily credit sales. A high days sales outstanding may indicate a customer base with
with credit problems or an entity that is easier with its credit policy or collection activity.
Inventory turnover=net sales divided by average inventory at selling price or cost of goods sold divided by average inventory at cost.. This is a
measure of the number of times inventory is used or sold in a time period. A low turnover may indicate overstocking or high inventory levels.
levels. But higher inventory levels are sometimes maintained in anticipation of rising prices or expected shortages. If inventory levels are high
high there is an additional cost for warehousing. A high inventory turnover rate may indicate inadequate inventory levels which could result
in a loss of business opportunities.
Return on Sales=operating profit or margin divided by net sales which is expressed as a percentage. It is a measure of how efficiently an entity
turns sales or revenue into profits or the amount of profit earned per dollar of sales
Return on Equity=net income divided by shareholders equity. An overall measure of performance─profit earned per dollar of investment. It
is also considered an entities return on net assets. Return on equity is a factor in valuation of an entities market value.
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34. Contact Information
Bob Dickson
724-272-1527
bo@dicksonconsulting.biz
www.dicksonconsulting.biz
Connect with me on LinkedIn
https://www.linkedin.com/in/dickson1/
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35. THE END
I hope that this presentation was informative
and useful to you!
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