Financial Reporting for Entrepreneurs

Financial Reporting
for Entrepreneurs
UNDERSTAND, ANALYZE AND EXPLAIN
FINANCIAL STATEMENTS AND HOW THEY
RELATE TO AN ENTREPRENEURIAL BUSINESS
Bob Dickson
Dickson Consulting
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CONTENTS
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FINANCIAL REPORTING FOR ENTREPRENEURS
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Chapter 1
Introduction-Fitting
the Pieces Together
Chapter 2
Key Financial
Statements-The Basis
for Financial Reporting
Chapter 3
Basis of Presentation
of Financial
Statements
Chapter 4
Financial Statement
Analysis
Chapter 5
Independent Review
of Financial
Statements
Chapter 6
Users of Financial
Statements
Chapter 7
Financial Statements-
The Base for Financial
Forecasting
Chapter 8
Footnotes to Financial
Statements-Last But
Not Least!

Chapter 1
Introduction-Fitting the
Pieces Together
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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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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.
Need for cash and fundraising issues.
Complex accounting issues such as revenue recognition.
Communication with outsiders and users of financial statements to enhance
trust in management.
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An Entrepreneurs Challenge-
Juggling!
Reporting
Research
Develop
ment
Funding
Vendors
Customers
Recruiting
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Purposes of Education on
Financial Reporting
To provide an overview of financial reporting concepts to enable
entrepreneurs to better understand and explain financial
statements.
To provide these concepts in an easy to read format that
highlights the key points in an understandable fashion.
To provide examples of elements of financial reporting.
To familiarize entrepreneurs with forms of review and opinions
on financial statements.
To illustrate and explain financial analysis and ratios.
Recognition that management is responsible for financial
statements.
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Purposes of Financial Reporting
Provide financial information about the reporting entity that is useful to existing and potential
investors, vendors, customers and lenders and other creditors in making decisions about providing
to or using of resources to the entity.
The information provided about financial performance helps existing and potential investors, lenders
and other creditors to understand the return the entity has produced on its economic resources and
the execution of business strategies. Decisions by lenders about providing or settling loans and other
forms of credit depend on the principal and interest payments or other returns that they expect.
Information about an entity’s financial performance in a period, reflected by changes in economic
resources (other than by obtaining additional resources directly from investors or creditors) is useful
in assessing the entity’s past and future ability to generate net cash flows.
Decisions by investors about buying, selling or holding equity and debt instruments depend on the
returns that they expect from an investment in those instruments, eg dividends, principal and
interest payments or market price increases.
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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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What This Presentation Does
Not Cover And Why
The intricacies of accounting standards, except as we have disclosed in some sample footnotes,
because each accounting standard is generally complex and the method of implementation of an
accounting standard can differ between industries and companies.
The unique financial reporting requirements for publicly traded companies under the guidelines
of the U.S. Securities and Exchange Commission. These financial reporting requirements
generally extend the scope of financial reporting beyond the scope of non-public companies.
Financial reporting requirements to specific industries because they are generally unique
requirements.
International financial reporting requirements because this presentation is focused on U.S. based
and operating entities. For example, accounting for and disclosure of foreign currency translation
is not included in this presentation.
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Forms of Business
Organizations
A proprietorship is generally owned by one individual and are usually small
entities.
A partnership is similar to a proprietorship except that it is owned by two or
more individuals. Some may be active partners, working in the business, and
others may be inactive or passive partners.
A corporation is organized under state or federal statues as a separate legal
taxable entity, The form of organization may provide certain financing and
legal benefits.
A limited liability company (LLC) combines attributes of a partnership and a
corporation in that it is organized as a corporation. However, a limited
liability corporation can elect to be taxed as a partnership which provides
some tax benefits and certain legal protections.
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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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Feedback and Comments
Your constructive comments and feedback are welcomed! Please email any
comments you have to Bob Dickson at bo@dicksonconsulting.biz. Please refer to
the specific the specific slide that your comment relates to.
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Chapter 2
Key Financial
Statements-The
Basis for Financial
Reporting
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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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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
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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).

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.
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As of
xx xx,
xx20
As of
xx, xx
xx20
Current
assets
Current
liabilities
Noncurrent
assets
Noncurrent
Liabilities
Shareholders’
equity

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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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.
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As of xx xx, xx20
Cash and cash equivalents
Accounts receivable
Inventory
Prepaid expenses and other current assets
Total current assets

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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Balance Sheet-Example of
Noncurrent Assets
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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

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.
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xx xx,
xx20
Trade accounts payable
Compensation expenses and taxes
Income taxes
Other current liabilities
Total current liabilities

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

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.
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As of xx xx ,
20xx
Common stock
Preferred stock
Retained earnings
Other
Total shareholders equity

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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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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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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Financial Reporting for Entrepreneurs
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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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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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Statement of Cash Flow-Cash Provided
by/Used for Operations
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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.

Overview of Statement of Cash
Flow-Provided By Operations
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XX Months Ended
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

Example of Statement of Cash Flows
from Investing and Financing Activities
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Cash flows used for 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

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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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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Chapter 3
Basis of Presentation
of Financial Statements
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Use of Estimates and
Assumptions
The preparation of financial statements requires management to make
estimates and assumptions.
These estimates affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period.
Actual results could differ from those estimates.
However, estimates are expected to be based on thorough analysis and
precise calculations.
Remember that the financial statements and the supporting estimates and
assumptions are managements responsibility,
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Examples of the Use of
Estimates and Assumptions
Estimates for allowances for uncollectible accounts receivable, These estimates can be based
on a review of specific customer accounts or a historical trend analysis based on the current
economic environment.
Unusable inventory. This estimate can be based on a review of specific inventory items and
quantities based on an estimate of inventory to be used in production.
Deferred income taxes. Estimates of future taxable income are based on forecasted
operations and the application of existing jurisdictional tax laws.
Contingent liabilities. These liabilities are established based on events that are probable and
reasonably estimable. A description in the footnotes, including a potential range of losses,
supplements the balance sheet amount recorded.
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Cash vs. Accrual
A Question of Timing of Recognition of
Transactions
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Accrual basis of accounting and financial reporting
• Records revenues when goods have been delivered or services have been performed, regardless
of when cash is received..
• Records expenses when resources are consumed, regardless of when payment is made.
• Preferable for providing the most useful information to financial statement users. Provides a
more accurate picture of an entities' profitability.
• GAAP requires use of the accrual basis.
• Keeps in place the matching principle–which states that expenses incurred in generating revenue
should be shown during the same time period as that revenue
Cash basis of accounting and financial reporting
• Records revenue when cash is received.
• Records expenses when cash is paid.
• Does not recognize transactions completed but cash is not received or paid.

Tax Reporting
Tax basis reporting
oReporting for Internal Revenue Service and state and local taxing authorities
oGoverned by complex laws administered by the IRS, states and local
governments
oSubject to change based on legislative action and court decisions
oComplications generally require a tax specialist’s involvement
oDifferent accounting treatments results in different “net income”-referred to
as “taxable income”
oExamples of differences=depreciation, inventory valuation, deferred
liabilities, meals and entertainment expense, other tangible liabilities
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Chapter 4
Financial Statement AnalysisDICKSON CONSULTING
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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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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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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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EBITDA Calculation
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Net income
Plus interest expense
Plus income tax expense
Plus depreciation
Plus amortization
= EBITDA

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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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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Chapter 5
Independent Review of Financial Statements
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Independent Review of
Financial Statements
Compilation
Review
Limited scope audit
Full scope audit
Special purpose audit
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Compilation
Preparation of financial statements without
questioning underlying records, estimates or
assumptions.
Done for purposes of presenting financial statements
only. No representation as to accuracy.
May not contain all financial statements and footnotes
to financial statements. For example may only be
balance sheet and statement of operations.
Limited value to user since no level of independent
assurance and inadequate disclosures.
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Review
Financial statements complied and read or reviewed by an
independent party to determine if they are appropriately
presented.
Review constitutes questions asked based on financial
statement items that may appear inaccurate but no
independent examination of estimates, assumptions or
underlying records.
Of some value since they have been read and reviewed by
a professional. Particularly if full financial statements and
footnotes are presented.
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Limited Scope Audit
Limited scope audit examines certain aspects of financial statements and a
report is prepared thereon or the scope of the examination if limited in
some way that prohibits and opinion on the full financial statements.
For example, an independent accountant cannot provide an opinion on
overall financial statements because the scope of the examination has
been limited in some way. For example, the independent auditor did not
observe the opening physical inventory to support the opening balance
sheet and cost of sales amounts reported.
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Full Scope Audit
Independent auditor performs an examination
of financial statements in accordance with
Generally Accepted Auditing Procedures
(GAAP).
Ensures financial statements conform with
GAAP.
Overall examination based on materiality.
Immaterial errors may not be discovered.
Review of internal accounting controls. No
assurances that fraud has not occurred.
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Special Purpose Audit
Examination or audit of a specific, narrower area than an
audit of the full financial statements,
Special purpose audits can be done in connection with
mergers and acquisitions or to address concerns or answer
questions.
For example, if an entities assets are being acquired the
acquiror may want an audit of inventory.
Another example would be if a fraud is suspected a special
purpose audit might be requested to investigate.
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Chapter 6 Users of Financial
Statements
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Users of Financial Statements
Management
Shareholders’/Owners
Potential investors
Bankers
Regulatory agencies
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Management
Management is responsible for managing and operating the operations. A scorecard is
necessary to gauge measure operations and gauge performance.
Different managers have interest in and responsibility for different aspects of the financial
performance. So all managers should have an interest in the financial statements and
use them as a tool to measure and improve performance.
Management is responsible for reporting to the board of directors, shareholders and
others on a periodic basis.
•Need for accuracy to enhance credibility. Mistakes create doubt.
•Need to meet contractual and regulatory requirements.
•Basis for metrics for compensation-stock options, etc..
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Shareholders/Owners
Shareholders/owners need information regarding
the entity they invested in.
•Need to feel secure that their investment has been
managed appropriately.
•Need to understand actual performance and return
on their investment.
•May need to rely on financial statements for
buy/sell decision.
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Potential Investors
Financial statements provide a historical pathway for potential
investors to help understand the history of the business.
Financial statements provide a current benchmark to compare
to other businesses and potential investment opportunities.
Financial statements are the starting point for financial
forecasting necessary to evaluate value of a potential
investment. Without reliable financial statements, it is less likely
that a potential investor will devote the time necessary to
evaluate an investment opportunity.
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Bankers and Other Lenders
Financial statements are bankers and lenders window to an entitie’s
performance.
Debt agreements focus on need for financial statements.
•Required reporting of defined assets, financial ratios and financial
statements.
•Defined financial ratios basis for many debt covenants
•Assets, such as accounts receivable and inventory, may be security for debt
and may determine the amount that can be borrowed.
•Requirement for GAAP financial reporting and audited financial statements.
Your banker is a needed business partner and their requirements need to be
satisfied to maintain their commitment.
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Management Perspective on
Financial Statements
The reporting of results or operations in financial statements relates to all of the
management team, not only the financial staff. And the financial role in financial
statements goes beyond mere issuance of financial statements. For example:
•Are the efforts of sales and marketing people resulting in the intended impact on
revenue volume, mix and pricing? Does gross margin reflect these efforts? Are
changes in selling expenses reasonable in relation to the changes in revenue and
gross margin?
•Are the initiatives of operating, purchasing and quality personnel having an
impact on costs, particularly cost of sales and gross margin? Are inventory
balances controlled in accordance with the intent of management?
•Are administrative costs controlled so that they do not have an adverse impact on
the reported results of operations?
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Regulatory Agencies
Regulatory agencies have a requirements that an
entities financial statements are required for:
•Taxing authorities
•Securities and Exchange Commission
Financial statements often disclose regulatory
issues or contingencies such as lawsuits or
contingent legal issues.
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T

Chapter 7
Financial Statements-The Base for
Financial Forecasting
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REPORTING FOR ENTREPRENEURS
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Financial Statements the Base
for Financial Forecasting
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Historical financial statements serve as a basis for forecasting of future results. Historical trends and ratios are
indicative of future results.
Financial modelling, generally using Excel, is necessary to provide a structure for the financial forecast model.
Models should reflect historical results and indicate the assumptions used to change historical trends and ratios.
Forecasting of cash flow is particularly important. This requires forecasting of balance sheet amounts, for such
things as working capital requirements, investments required for growth and the results of operations.
Frequently, financial forecasts are the basis for calculating the discounted cash flow value of an entity in a
merger and acquisition transaction.
Financial modelling is done internally and externally by lenders, stock analysts, potential acquirers of a business,
etc.. It is important that external parties understand the business and have confidence in the financial forecast
and the model.

Chapter 8
Financial Statement Footnotes-Last But
Not Least!
65

Footnotes to Financial
Statements
Footnotes are used to convey information required by GAAP
or to provide further explanation. The footnotes are important to understand
the details of the financial statements and some aspects of the entities
business.
Footnotes generally include the following information:
•Statements of Accounting Policies which describe the accounting policies used and
may address proposed and recently implemented accounting policies.
•Details of balance sheet amounts to break down balances into their major
components.
•Additional information not contained in the financial statements such as
contingencies or legal matters which could impact the financial statements.
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Example Footnote-Statement of
Accounting Policies-Description of
Business and Nature of Operations
A brief description of the entity is generally the lead paragraph of the footnotes. For example:
Entrepreneurial Company (individually, or collectively with its subsidiaries, as applicable, the
“Company”), is a non-publicly traded company headquartered in the State of Delaware in the United
States, The Company manufactures and distributes entrepreneurial products.
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Development Stage Enterprise
Frequently entrepreneurial entities have not reached the point were they are selling products. They may be considered
development stage companies until products are sold commercially. A special footnote is required.
Note 1 - Summary of Significant Accounting Policies
A. Organization and Basis of Consolidation
The financial statements include the accounts of the Company. the Company, a development stage enterprise, was
incorporated on xx xx, 20xx under the laws of the State of Delaware. The primary product, the Entrepreneurial Product, has
not received Food and Drug Administration (FDA) approval or the CE mark and it is not approved for sale in the United
States, Europe or any other country. The accompanying financial statements should not be regarded as typical for a normal
operating period as the Company remains in the development stage as of the date of these financial statements.
The Company is a medical device company which has not yet generated operating revenues and has incurred development
expenses which it has financed primarily through the issuance of convertible debt. Management seeks financing periodically
in amounts necessary to support short-term operations and has been successful in doing so.
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Going Concern Opinion
Funding is frequently an issue with entrepreneurial companies and questions may exist whether operations
can continue without additional funding. A special footnote similar to the following may be required.
Note 1 - Summary of Significant Accounting Policies
B. Going Concern
The Company is dependent upon obtaining additional capital to sustain its operations. Management is
pursuing additional financing. Management is discussing additional financing with venture capital firms, angel
groups and individuals to obtain enough funding for a first close of this round of financing.
Management believes that adequate additional funding will be obtained. Based on this belief and the low
overhead costs of the Company, these financial statements are prepared on a going concern basis.
69

Accounting Policies-Revenue Recognition
A statement on revenue recognition should be included. The GAAP requirements for revenue
recognition can be complex and implementation of the revenue recognition stands can vary from
company to company. This note can be expanded to describe any specific revenue recognition issues of
the company.
Revenue includes the sale of entrepreneurial products, which are generally delivered to customers, in
the period they are produced with the sales price based on prevailing market prices. The Company
recognizes revenue when it transfers control of the entrepreneurial products to the customer. Generally,
transfer of control occurs when the products have been delivered to the customer. Payment is made
based on payment terms negotiated with the customer, generally 30 days after delivery.
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Example Footnote-Statement
on Accounting Policy Cash
Cash might seem to a straight-forward balance sheet amount but disclosure of the accounting policy for cash should be made. Any restrictions
on the use of cash will require additional disclosure.
Cash Equivalents and Marketable Securities The Company classifies any marketable security with an original maturity date of 90 days or less at
the time of purchase as a cash equivalent. Cash equivalents are carried on the balance sheet at fair market value. The Company classifies any
marketable security with a maturity date of greater than 90 days at the time of purchase as marketable securities and classifies marketable
securities with a maturity date of greater than one year from the balance sheet date as long-term marketable securities.
The Company's marketable securities, consisting of U.S. Treasuries, U.S. Government Agency, corporate debt securities, and commercial paper,
are classified as available-for-sale securities and, accordingly, are recorded at fair value. The difference between amortized cost and fair value
is included in stockholders’ equity. Marketable securities that the Company has the positive intent and ability to hold to maturity are reported
at amortized cost and classified as held-to-maturity marketable securities. If the Company does not have the intent and ability to hold a
marketable security to maturity, it reports the investment as available-for-sale marketable securities. The Company reports available-for-sale
marketable securities at fair value, and includes unrealized gains and, the extent deemed temporary, unrealized losses in stockholders equity.
If any adjustment to fair value reflects a decline in the value of the investment, the Company considers available evidence to evaluate whether
the decline is other than temporary and if so, marks the marketable security to market through a charge reflected on the consolidated
statements of operations.
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Accounting Policies-Property, Plant and
Equipment
An example statement describing the accounting policy for property, plant and equipment follows.
Property, plant and equipment is carried at cost less accumulated depreciation and impairment losses or initially measured at fair
value if recorded as part of a business combination. The cost comprises the purchase price and any costs directly attributable to
bringing the asset to the location and condition necessary for it to be capable of operating in a manner intended by management.
Depreciation is recorded on a straight-line or accelerated basis, over the useful life of the asset. Depreciation an asset is considered
a component of the cost of that asset. Estimated useful lives of depreciable plant and equipment vary from three to fifteen years
and a maximum of 30 years for buildings.
Assets under construction are depreciated when they are substantially complete and available for intended use, over their estimated
useful lives. Management reviews the estimated useful lives and depreciation methods of the Company’s plant and equipment at
the end of each financial year, and when events and circumstances indicate that such a review should be made, Changes to
estimated useful lives or depreciation methods resulting from such reviews are accounted for prospectively.
72

Accounting Policies-Income Taxes
Income for financial reporting and tax purposes generally differ. Therefore the accounting policy for income taxes needs to
be described, For example:
The Company accounts for income taxes using a balance sheet asset and liability method of accounting, Deferred income
taxes are recognized for unused tax losses which may be carried forward, unused tax credits and temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for taxation
purposes.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is
realized or the liability is settled based on the tax laws and rates that have been enacted at the statement of financial
position date.
Deferred tax assets are attributable to net operating losses. A valuation allowance is required when it is “more likely than
not” that some portion or all of the deferred tax assets will not be realized. The ultimate utilization of deferred income tax
assets depends on the Company’s ability to generate sufficient taxable income in the future. Deferred tax assets are reduced
by a valuation allowance when management determines that it is more likely than not that some or all of the deferred tax
assets will not be realized. Deferred tax assets are reviewed at each reporting date.
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Accounting Policies-Goodwill
Goodwill is an accounting value sometimes created and and reported by an acquiring company. An accounting policy statement for goodwill follows:
Goodwill is recorded when consideration for an acquisition exceeds the fair value of the net tangible and intangible assets acquired. Goodwill is not amortized. The Company evaluates goodwill for
impairment at least annually, as well as whenever events or changes in circumstances suggest that the carrying amount may not be recoverable. In applying the goodwill impairment test, the
Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than it’s carrying value. Qualitative factors may include, but are
not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company's products and services, regulatory and political developments,
cost factors, and entity specific factors such as strategies and overall financial performance. If, after assessing these qualitative factors, the Company determines it is more likely than not that the fair
value of a reporting unit is less than it’s carrying value, then performing a two-step impairment test is necessary.
The goodwill test involves a two-step process. The first step is a comparison of the reporting unit’s fair value to its carrying value. If the reporting unit’s fair value exceeds its carrying value, no further
procedures are required. However, if the reporting unit’s fair value is less than the carrying value, an impairment of goodwill may exist, requiring a second step to measure the amount of impairment
loss. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge is recorded for the difference. The goodwill impairment test is performed at the reporting unit level
by comparing the reporting unit’s carrying value, including goodwill, to the fair value of the reporting unit. The Company estimates the fair value of its single reporting unit using a combination of th e
income approach and the market approach. The income approach incorporates the use of a discounted cash flow method in which the estimated future cash flows and terminal values for the
reporting unit is discounted to a present value using an appropriate discount rate. Cash flow projections are based on management’s estimates of economic and market conditions which drive key
assumptions of revenue growth rates, operating margins, cash flows, capital expenditures and working capital requirements. The discount rate isb ased on the specific risk characteristics of the
reporting unit and its underlying forecast. The market approach estimates fair value by comparing publicly traded companies with similar operating and investment characteristics as the reporting
unit. The fair values determined by the market approach and income approach, are weighted to determine the fair value for the reporting unit based primarily on the similarity of the operating and
investment characteristics of the reporting unit to the comparable publicly traded companies used in the market approach.
.
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Accounting Policies-Leases
Leases of facilities and equipment are not unusual for entrepreneurial companies. GAAP is changing for leases and
frequently companies describe compliance with GAAP in the footnotes.
Lease agreements are evaluated to determine whether they are capital or operating leases in accordance with Financial
Accounting Standards Board, or ASC, 840, Leases. When one of the four test criteria in ASC 840 is met, the lease then
qualifies as a capital lease. Capital leases are capitalized at the lower of the net present value of the total amount payable
under the leasing agreement (excluding finance charges) or the fair market value of the leased asset. Capital lease assets are
depreciated on a straight-line basis, over a period consistent with the Company's normal depreciation policy for tangible
fixed assets. Interest charges are expensed over the period of the term of the capital lease obligation in relation to the
carrying value of the capital lease.
Rent expense for operating leases, which may include free rent or fixed escalation amounts in addition to minimuml ease
payments, is recognized on a straight-line basis over the duration of each lease term.
Effective April 1, 2019, the Company will adopt ASU 2016-02, Leases. This new guidance requires the lease commitments to
be recognized as operating lease liabilities and right-of-use assets, which will increase total assets and total liabilities that the
Company will report on its consolidated balance sheet in future periods.
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Accounting Policies-In-Process
Research and Development
In connection with an acquisition of an entrepreneurial company, in-process research and development is frequently a
valuable asset. The acquiring company values this research and records the value on it's balance sheet. An example of
accounting policy follows.
In-process research and development, or IPR&D, assets are considered to be indefinite-lived until the completion or
abandonment of the associated research and development projects. IPR&D assets represent the fair value assigned to
technologies that are acquired, which at the time of acquisition have not reached technological feasibility and have no
alternative future use. During the period that the IPR&D assets are considered indefinite-lived, they are tested for
impairment on an annual basis, or frequently if the Company becomes aware of any events occurring or changes in
circumstances that indicate that the fair value of the IPR&D assets are less than their carrying values. If and when
development is complete, which generally occurs upon regulatory approval and the Company is able to commercialize
products associated with the IPR&D assets, these assets are then deemed definite lived and are amortized based on
estimated useful lives at that point in time. If development is terminated or abandoned, the Company may have a full
partial impairment charge related to the IPR&D assets, calculated as the excess of carrying value of the IPR&D assets
value
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Example Footnote-Statement on
Accounting Policy-Accrued Expenses
Accrual accounting is the preferred method of accounting for business entities. Accruing expenses is therefore required. An
example footnote follows:
As part of the process of preparing its financial statements, the Company is required to estimate accrued expenses. This
process includes identifying services that third parties have performed and estimating the level of service performed and the
associated cost incurred on these services as of each balance sheet date in its financial statements. Examples of estimated
accrued expenses include estimates for certain payroll costs, such as bonuses and commissions; contract service fees, such as
amounts due to clinical research organizations and investigators in conjunction with clinical trials; professional service fees,
such as attorneys and accountants, and third-party expenses relating to marketing efforts associated with commercialization
of the Company’s product and product candidates. In the event that the Company does not identify certain costs that have
been incurred or it under or over-estimates the level of services or the costs of such services, reported expenses for a
reporting period could be overstated or understated. The dates in which certain services commence and end, the level of
services performed on or before a given date and the cost of services is often subject to the Company’s judgment. The
Company makes these judgments and estimates based upon known facts and circumstance
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Example Footnote-
LicenseAgreements
Entrepreneurial companies license technology from universities or other companies to begin or enhance their product development. An example footnote for license agreements follows.
In 20xx, the Company entered into a license agreement with Main University under which the Company obtained exclusive, world-wide rights to use, develop and commercialize patented
technology, including a major product, the Entrepreneurial Product. As a partial royalty for the licensed rights the Company provided Main University with shares of common stock. In addition,
the Company issued a warrant for additional common stock to be exercised on the day the Company’s cumulative capital funding equals $x,000,000. The Company anticipates that the
cumulative capital funding will reach $x,000,000 and additional shares will be issued to Main University in 20xx.
Under the license agreement with Main University, the Company is required to pay royalties equal to x% of net sales of the Company with respect to the licensed product. The license
agreement continues until such time as all of the patents for the licensed technology have expired. Royalty fees have not yet been incurred by the Company under this license agreement.
In 20xx the Company entered into a license agreement with the State University under which the Company obtained exclusive use in specific areas for rights to certain patented technology. An
initial license fee of $x,000 was paid in 20xx and an annual maintenance fee of $x,000 is due annually until the Company’s net sales begin.
Under the license agreement with State University, the Company is required to pay royalties equal to x% of net sales of the licensed technology for sales of products requiring regulatory
approval and covered by a valid patent claim and royalties of x% of net sales of the licensed technology for sales of products requiring regulatory approval and not covered by a valid claim, but
covered by know-how.
The license agreement with State University also contains a provision for a deferred royalty fee due on the first to occur of a change in control event, liquidation event or initial public offering
(“Trigger Event”). If the Trigger Event is less than or equal to $xx,000,000, State University will receive a deferred royalty fee equal to x%. If the Trigger Event is greater than $xx,000,000, State
University will receive a deferred royalty fee equal to $x00,000 plus x.x%.
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Example Footnote-Convertible
Debt
Issuer Date Issued Total
Economic development group 6/26/20xx $
Private individual 12/24/20xx
University related 2/7/20xx
Strategic investor 1/24/20xx
Angel Fund 9/4/20xx
Total $
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Entrepreneurial entities frequently issue convertible debt. Notes tat may be converted into common stock.
An example of a footnote for convertible debt follows.
The following table summarizes convertible debt of the Company outstanding as of xx xx, 20xx:
All convertible debt is entitled to a conversion discount when converted to preferred stock. Convertible debt accumulates interest at x%
(except for one convertible debt instrument is at 10%) which is not paid and the accumulated amount may be converted to
preferred stock at the time of conversion. At xx xx, 20xx the accumulated interest was approximately $ xx
the Company is pursuing additional funding in 20xx and if successful would convert the convertible debt to preferred stock.
79

Example Footnotes-Shareholders
Equity and Stock-Based
Compensation
A footnote on shareholders’ equity would describe the types of investments made in the entity, shares
outstanding, par value and any special features connected to the investments. A reconciliation from the
beginning of the period to the end of the period is generally disclosed to reflect the amounts and dates of
changes.
Stock options and other forms of stock-based compensation are frequently an important benefit for
employees of entrepreneurial companies. Those plans include all arrangements by which employees
receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. Examples are stock purchase plans,
stock options, restricted stock, and stock appreciation rights.
Financial reporting standards have been established for stock-based employee compensation plans.
Disclosure would include a reconciliation from the beginning of the period to the end of the period, the
range and average of strike prices per share, shares vested and unvested, the average besting period, etc.
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Example Footnotes-Detail of
Balance Sheet Amounts
Various note provide additional details on balances on the balance sheet. Examples are:
An inventory footnote may reflect balances for raw material, work-in-process and finished goods.
A property footnote may reflect original cost amounts for land, buildings and equipment with a subtotal
and then deduct the total accumulated depreciation for all to arrive at the depreciated cost on the
balance sheet.
A prepaid expenses may reflect individual balances for prepaid expenses, prepaid rent, prepaid insurance
and other significant prepaids with more minor amounts included in other. The total would agree with
the amount on the balance sheet.
Others would include accounts receivable, accrued expenses, accrued compensation, accrued income
taxes, etc..
81

THE END
I hope that this presentation was informative
and useful to you!
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Financial Reporting for Entrepreneurs

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