Entrepreneurship Ch 8 PPT Fin Statements.ppt

Entrepreneurship
Chapter 8
Using Financial Statements to
Guide a Business

Entrepreneurship, 2nd Edition
Mariotti and Glackin with NFTE
© 2010 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
2
Entrepreneurs Use Financial
Statements
 Income statement
 Cash flow statement
 Balance sheet
 Data for the financial statements comes from
the accounting journal.
 The statements show the health of the business
at a glance.

3
Income Statement: Scorecard for
the Entrepreneur
 Prepared monthly and at end of fiscal year
 Also called “profit and loss statement”
 Shows whether or not business is making a
profit
 Profit is entrepreneur’s reward for adding
value to scarce resources

4
8 Parts of the Income
Statement
1. Revenue
2. Cost of Goods Sold (COGS)
3. Other Variable Costs
4. Contribution Margin (Gross Profit)
5. Fixed Operating Costs (USAIIRD)
6. Pre-Tax Profit
7. Taxes
8. Net Profit/(Loss)

5
Income Statement

6
A Simple Income Statement

7
Income Statement for a More
Complex Business

8
Return on Investment (ROI)
 Entrepreneurs “invest” time, energy or money
into something because they expect a
“return” of money or satisfaction.
 Return on investment (ROI) measures
return as a percentage of the original
investment.
Net Profit/Investment X 100 = ROI%
What is made over what is paid, times 100.

9
To Calculate ROI for a Business,
You Need 3 Things:
1. Net Profit: found on bottom line of the
income statement.
2. Investment: all money used to start the
business (Start-Up Investment) plus
additional money invested later.
3. The period of time for which you are
calculating ROI (typically one month or one
year).

10
Income Statement Ratios
 Express each line of the income
statement as a percentage by dividing
sales into it and multiplying by 100.
 This makes it easy to see how each
item is affecting the business’s profit.
 Return on Sales (ROS) =
Net Income/Sales
 Operating Ratio =
Fixed Operating Costs/Sales

11
Same Size Analysis: Used to
Compare Income Statements

12
The Balance Sheet
 A “point-in-time” statement
 Shows how a business is financed
 Prepared at end of fiscal year 3 items
 Assets=things a company owns that are
worth money
 Liabilities=debts a company must pay,
including unpaid bills
 Owner’s Equity (OE)=Assets-Liabilities,
also called “net worth”

13
Balance Sheet

14
Short and Long-Term Assets
Assets are all items worth money owned by the business:
 Current assets—cash or items that can be quickly turned into
cash.
 Accounts receivables
 Inventory
 Supplies
 Long-term assets—items that would take the business more
than one year to use.
 Equipment
 Furniture
 Machinery
 Real estate

15
Current and Long-term Liabilities
Liabilities are all debts owed by the business.
 Current liabilities—debts that must be paid within one
year.
 Bills
 Lines of credit
 Short-term loans
 Long-term liabilities—debts that will be paid over
more than one year.
 Bank loans
 mortgages

16
The Balance Sheet Equation
Assets – Liabilities = Owner’s Equity
or
Assets = Owner’s Equity – Liabilities
Owner’s Equity is also called:
 Net worth
 Capital

17
Assets Must Equal (“Balance”)
Liabilities + O.E.
 If an item was financed with debt, the loan is a liability.
 If an item was purchased with the owner’s money, it was
financed with equity.
 Liabilities and owner’s equity pay for all items owned by
the business (assets).

18
Analyzing a Balance Sheet
 The balance sheet shows how a business is financed.
 Investors use ratios and “same-size” analysis to
analyze a balance sheet.

19
“Same Size” Balance Sheet Analysis

20
Quick and Current Ratios
Quick Ratio: Cash + marketable securities
Current Liabilities
 Should always be greater than 1
 Shows whether there is enough cash to cover all bills within
24 hours
Current Ratio: Current Asset
Current Liabilities
 Should always be greater than 1
 Shows whether a business could sell some assets to pay off
its debts

21
Debt Ratios
Debt ratios show at a glance how much of the company is financed
with debt and how much with equity.
Debt-to-Equity Ratio: Debt/Equity
Example: ratio of 1 means for every $1 of debt the company
owns $1 of assets.
Debt Ratio: Debt/Assets
Example: ratio of 0.5 means company is in debt for 50% of its
assets.
Entrepreneurs like to have a fairly high debt ratio, because it
means they are financing the business not with their own
money but with credit from creditors and suppliers.

22
Operating Efficiency Ratios
 Collection Period Ratio:
Average accounts receivable (Balance Sheet)
Average daily sales (income Statement)
 Receivable Turnover Ratio:
Total Sales (Income Statement)
Average Accounts Receivables (Balance Sheet)
 Inventory Turnover Ratio:
Cost of Goods Sold (Income Statement)
Average Inventory (Balance Sheet)
= # of days
= # of times
= # of times

Entrepreneurship Ch 8 PPT Fin Statements.ppt

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