CHAPTER Section 11.1 Income Statements & Cash Flow Section 11.2 The Balance Sheet FINANCIAL STATEMENTS

SECTION OBJECTIVES Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Explain the importance of an income statement Identify the parts of an income statement Prepare an income statement Understand how cash flow affects entrepreneurs Demonstrate a burn-rate calculation Income Statements & Cash Flow 2

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Income Statements Income statements are prepared periodically to show how a business is performing:  Monthly  Quarterly  Annually Income statements differ in how they show their variable expenses. They may appear under:  Cost of Goods Sold  Cost of Goods Manufactured and Sold  Cost of Services Sold 3

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Parts of a Typical Income Statement Income statements generally include these parts: Revenue. The money the business receives from selling products or services. Cost of Goods Sold. The cost of producing the goods or services. Gross Profit. Net sales minus the cost of goods sold. Operating Expenses. The expenses of running the business. Pre-Tax Profit. Gross profit minus the operating expenses. Net Profit (Loss). Pre-tax profit minus taxes. 4

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Traditional-Format Income Statement 5

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Contribution-Margin-Format Income Statement 6

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Preparing Income Statements To prepare an income statement: 1. Determine the business's Revenue. 2. Calculate the Cost of Goods Sold. 3. Determine the Gross Profit. 4. Calculate Operating Expenses. 5. Determine the Pre-Tax Profit. 6. Determine the Net Profit or Loss. 7

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Cash Flow The cash flow equation is: A cash flow statement is a financial document that records inflows and outflows of cash when they actually occur. 8

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Ways to Keep Cash Flowing Five ways to avoid being caught without enough cash to pay your bills are: 1. Collect Cash as Soon as Possible 2. Pay Bills Close to the Due Date 3. Keep Track of Your Cash 4. Lease Equipment 5. Keep Inventory to a Minimum Cash flow is cyclical for many businesses, meaning that it varies according to the time of year. 9

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. The Burn Rate Use the burn rate to calculate how long a company can go without revenue. 10

SECTION OBJECTIVES Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Identify the purpose and components of a balance sheet Explain how balance sheets are prepared Provide two methods used to analyze balance sheets The Balance Sheet 11

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. What Is a Balance Sheet? The balance sheet focuses on the fundamental accounting equation: Assets include everything owned by the business that has a monetary value. Liabilities include any outstanding bill or loan that must be repaid. The value of the business on a specific date is referred to as the owner’s equity. 12

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. What Is a Balance Sheet? Assets are the items of value owned by a business.  Short-term assets that can be converted into cash within one year are current assets.  Assets that usually take longer than one year to turn into cash are long-term assets. Liabilities are all sums of money owed by the business.  Short-term debts that must be repaid within one year are current liabilities.  Debts that usually take longer than one year to repay are long- term liabilities. 13

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Preparing Balance Sheets To prepare a balance sheet: 1. Determine the value of the company’s assets. 2. Establish the value of the business’s long-term assets. 3. Verify the company’s total liabilities. 4. Determine the value of the business’s long-term assets. 5. Calculate the business's long-term liabilities. 6. Determine the owner’s equity. 14

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Analyzing Balance Sheets A business usually prepares one balance sheet at the beginning of its fiscal year and another at the end of it and compares them to determine whether the business is succeeding or not. Using the Comparative Balance Sheet method, a business can see what has changed after one year by checking the differences between the beginning and ending balances. With Same-Size Balance Sheet Analysis, a percentage column is added so that the business can quickly see the percentage change in all balance sheet items from one year to the next. 15