Quick

1
Quick Dirty Introductionto Financial Statements

• Small Business Management Entrepreneurship
• AAEC 3454

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Main Financial Statements

• Balance Sheet
• List of Assets, Liabilities, Net Worth on a
  given date
• Cash Flow Statement (Cash Budget)
• List of Cash Receipts Disbursements over a
  given period
• Income Statement
• List of Revenues Expenses over a given time
  period
• Well use Schedule C (1040) as a proxy

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Balance Sheet

• List of a firms assets, liabilities, and net
  worth at a certain point in time
• Assets Total Liabilities Net Worth
• Always holds true!!
• Note Net Worth Owners Equity
• In Business, assets are listed at Book Value
• Purchase Price - Accumulated Depreciation

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Assets

• Assets - anything owned that has monetary value
• historical cost valuation(cost less accumulated
  depreciation)
• Current Assets
• life under one year
• cash or easily turned into cash
• Non-Current Assets
• life longer than one year
• not readily convertible into cash
• assets that support production or delivery of
  service
• permanent or fixed property

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Liabilities Owner Equity

• Liabilities - all claims against the business or
  individual
• Current Liabilities
• items due to be paid within one year
• Non-Current Liabilities
• items due to be paid beyond one year
• Owner Equity - net worth of business (Assets -
  Liabilities)
• contributed capital
• retained earnings
• common stock (corporation)
• additional paid-in capital (corporation)

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Balance Sheet

• Very Important for obtaining credit
• Helps evaluate Liquidity and Solvency
• Liquidity ability to meet short-term
  obligations as they come due, without disrupting
  normal operations
• Involves Current Assets Current Liabilities
• Solvency ability to meet all obligations as
  they come due
• Involves Total Assets Total Liabilities
• Also called Financial Statement or Net Worth
  Statement

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Balance Sheet Structure

• Assets
• Current Assets- cash (checking/savings)-
  accounts receivable- inventory- prepaid
  expenses- marketable securities- supplies
• Non-Current Assets- land- buildings-
  machinery- non-marketable sec.
• (A) Total Assets

• Liabilities Equity
• Current Liabilities- accounts payable- accrued
  expenses- current principal- accrued interest-
  operating loan balance
• Non-Current Liab.- principal on term loans
• (B) Total Liabilities
• (C) Owner Equity (A - B)
• Total Liab. Owner Equity
• (B C) A

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Cash Flow Statement(Cash Budget)

• Listing of cash inflows and outflows over a
  specific time period
• Used to determine liquidity (cash flow),
  repayment ability and operating loan needed
• May include non-business income or family living
  expense for sole proprietorships or partnerships
• Includes income taxes
• Includes principal and interest payments (PI)
• Does NOT include Depreciation (Non-cash expense)

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Cash Flow Structure

• (A) Cash Inflows
• (B) Cash Outflows
• (C) Net Cash Flow (A-B)
• Short-Term Borrowing Needs

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Income Statement

• Also called Profit Loss Statement (PL)
• Can use Schedule C (F for Farms) as a proxy
• List of all Revenues and Expenses incurred over a
  period of time
• Used to
• Measure the profitability of the firm over a
  specific time period
• Weekly, Monthly, Quarterly, Yearly, etc.
• Measure repayment ability
• Determine income tax liability

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Income Statement

• Income Statement includes
• Revenues from sales
• Cash/Accrual differences in what is reported!
• Other revenues
• Changes in inventories (Accrual Method)
• Expenses from operations
• Cash and non-cash (depreciation)
• Cost of goods sold, operating expenses, interest
  expense, income taxes
• Does not include Principal payments!

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Income Statement Structure

• (A) Revenues
• - cash revenues- value of changes in
  inventories accounts receivable (accrual)
• (B) Cost of Goods Sold
• (C) Gross Profit (A-B)
• (D) Expenses
• - cash expenses- non-cash expenses
  (depreciation)- changes in accrual expenses
  accounts payable (accrual)
• (E) Earnings Before Interest Taxes (EBIT)
  (C-D)
• (F) Interest Expense
• (G) Earnings Before Taxes (E-F)
• (H) Income Taxes
• (I) Net Income (G-H)

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Income Statement vsCash Flow Statement

• Income statement includes
• Depreciation
• Changes in inventories
• Cash Flow Statement includes
• Principal payments
• Income taxes
• Family living expense (in certain cases)
• Non-business income

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Relationship between Statements

• Start with Current Balance Sheet
• Develop Cash Flow next
• Then develop Income Statement (PL)
• Then develop projected Balance Sheet

Current Balance Sheet
Projected Cash Flow
Projected Income Statement
Projected Balance Sheet