Accounting Statements and Financial Requirements

Slides:



Advertisements
Similar presentations
Ch. 2 - Understanding Financial Statements, Taxes, and Cash Flows, Prentice Hall, Inc.
Advertisements

Reporting Earnings and Financial Position
The Statement of Cash Flows
Ch. 2 - Understanding Financial Statements, Taxes, and Cash Flows , Prentice Hall, Inc.
How to Read, Analyze, and Interpret Financial Reports
Petty Cash Balance Sheet Debit Current Asset. Loss on Plant Asset Income Statement Debit Other Expense.
Chapter 2 - Understanding Financial Statements, Taxes, and Cash Flows  2005, Pearson Prentice Hall.
The Financial Statements
Chapter 3.
Chapter 3. SALES SALES - Cost of Goods Sold GROSS PROFIT GROSS PROFIT - Operating Expenses OPERATING INCOME (EBIT) OPERATING INCOME (EBIT) - Interest.
The Financial Plan Part 1: Projecting Financial Requirements
PowerPoint Presentation by Charlie Cook The University of West Alabama Longenecker Moore Petty Palich © 2008 Cengage Learning. All rights reserved. CHAPTER.
FINANCIAL STATEMENTS.
McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter 1717 Understanding Financial Information.
Chapter 16 How to Read, Analyze, and Interpret Financial Reports McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Overview of Finance. Financial Management n The maintenance and creation of economic value or wealth.
© 2005 Pearson Education Canada Inc. 2-1 Chapter Two Financial Statements, Cash Flows, Taxes, and the Language of Finance Principles of Corporate Finance.
Part 4 PowerPoint Presentation by Charlie Cook Copyright © 2003 South-Western College Publishing. All rights reserved. All rights reserved. Projecting.
©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones4 - 1 Chapter 4 Income Statement and Statement of Owners’
Finance and Accounting Lecture 2 Fall, /21/2015FINA4330 Corporate Finance1 Corporate Finance Ronald F. Singer FINA 4330.
Reporting and Analyzing Cash Flows Chapter 17. Purposes of the Statement of Cash Flows Designed to fulfill the following: – predict future cash flows.
REVIEW OF ACCOUNTING (Chapter 2) §Financial Statements l Balance Sheet l Income Statement l Statement of Cash Flows §Free Cash Flow §Corporate Taxes §Individual.
Chapter 2 - Understanding Financial Statements, Taxes, and Cash Flows 09/02/08.
Intro to Financial Management Understanding Financial Statements and Cash Flows.
Financials Start up Cost Source of Funds EquityLoans $20K$25K $45K Operational costs Fixed$43,085$113,700$281,840 Variable$29,570$163,220$460,975.
Slide 1 Understanding Financial Statements, Taxes, and Cash Flows Income Statement Balance Sheet Taxes Free Cash Flow (FCF)
24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing.
The Financial Statements Presentations for Chapter 2 by Glenn Owen.
C Learning Objectives Power Notes 1.Purpose of the Statement of Cash Flows 2.Reporting Cash Flows 3.Statement of Cash Flows – The Indirect Method.
13-1 Preview of Chapter 13 Financial and Managerial Accounting Weygandt Kimmel Kieso.
Th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt 2 C H A P T E R T W.
Th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt 2 C H A P T E R TWO.
Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Chapter 10 Accounting Statements and Financial.
PowerPoint Presentation by Charlie Cook The University of West Alabama Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
$$ Entrepreneurial Finance, 5th Edition Adelman and Marks Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ Chapter.
Chapter 2 Introduction to Financial Statement Analysis.
Chapter 3. Understanding Financial Statements and Cash Flows.
McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter 1717 Understanding Financial Information.
MGT 497 Financial Statements Prof. Rick Hayes, Ph.D., CPA.
Chapter 2 Introduction to Financial Statement Analysis.
Ch. 3 - Understanding Financial Statements and Cash Flows , Prentice Hall, Inc.
Finance Chapter 2 Financial statements. Financial statements & reports  Annual report—a report issued once a year by a corporation to its stockholders,
Ch. 3 - Evaluating a Firm’s Financial Performance and Measuring Cash Flow  1999, Prentice Hall, Inc.
13-1 Preview of Chapter 13 Financial and Managerial Accounting Weygandt Kimmel Kieso.
PREPARE THE FOUR FINANCIAL STATEMENTS 1. INCOME STATEMENT 2. RETAINED EARNINGS STATEMENT 3. BALANCE SHEET 4. CASH FLOW STATEMENT.
STATEMENT OF CASH FLOWS Prepared by James R. Reap
The Statement of Cash Flows
Job-Order Costing: A Microsoft Excel-Based Approach
ANALYZING START-UP RESOURCES
ANALYZING START-UP RESOURCES
ANALYZING START-UP RESOURCES
MEASURING FINANCIAL PERFORMANCE
Accounting and Financial Decisions
Understanding a Firm’s Financial Statements
How to Read, Analyze, and Interpret Financial Reports
Chapter 2 - Understanding Financial Statements, Taxes, and Cash Flows
How to Read, Analyze, and Interpret Financial Reports
Statement of Cash Flows
ANALYZING START-UP RESOURCES
Forecasting Financial Requirements
Gary A. Porter and Curtis L. Norton
Kevin J. Collins, CPA/PFS, MST
STATEMENT OF CASH FLOWS
Financial Analysis Quick ratio: ($22,000+ $41,500)/
Intro to Financial Management
BUSINESS HIGH SCHOOL-ACCOUNTING I
Review of Accounting 2 Chapter.
Budgeting for Planning and Control
How to Read, Analyze, and Interpret Financial Reports
“Accounting is the Language of Business”
Presentation transcript:

Accounting Statements and Financial Requirements Chapter 10 Accounting Statements and Financial Requirements In the Spotlight: Diamond Courier http://diamondcourier.com Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 10-1

Learning Objectives: Chapter 10 1. Describe the purpose and content of financial statements. 2. Explain how to forecast a new venture’s profitability. 3. Estimate the assets needed and the financing required for a new venture. Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 10-2

The Income Statement: An Overview Operating Activities Sales revenue Cost of producing or acquiring product or service (cost of goods sold) Gross profit Marketing and selling expenses and general and administrative expenses (operating expenses) Earnings before taxes Corporate taxes Financing Activities Operating income Interest expense on debt (financing costs) Taxes = = = Net income available to owners Earnings before taxes = Earnings before interest and taxes (operating income) Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 10-3

Bates & Associates’ Income Statement Sales revenue $830,000 Cost of goods sold _540,000 Gross profit $290,000 Operating expenses: Marketing expenses $90,000 General and administrative expenses 72,000 Depreciation _28,000 Total operating expenses $190,000 Operating income $100,000 Interest expense __20,000 Earnings before taxes $ 80,000 Income tax (25%) 20,000 Net income $ 60,000 Dividends paid $_15,000 Change in retained earnings $ 45,000 Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 10-4

The Balance Sheet: An Overview Assets Debt (Liabilities) and Equity (Net Worth) Current Assets Cash Accounts receivable Inventories Prepaid expenses Debt Capital Current Debt Accounts payable Other payables Accrued expenses Short-term notes Long-Term Debt Long-term notes Mortgages + Fixed Assets Machinery and equipment Buildings Land + Owner’s Equity Capital Owner’s net worth or Partnership equity Common stock equity + Other Assets Investments Patents = = Total Assets Total Debt and Equity Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 10-5

Bates & Associates’ Manufacturing Balance Sheets Assets 1998 1999 Changes Current assets: Cash $ 38,000 $ 43,000 $ 5,000 Accounts receivable 70,000 78,000 8,000 Inventories 175,000 210,000 35,000 Prepaid expenses 12,000 14,000 2,000 Total current assets $295,000 $345,000 $ 50,000 Fixed assets: Gross plant and equipment $760,000 $838,000 $ 78,000 Accumulated depreciation 355,000 383,000 28,000 Net plant and equipment $405,000 $455,000 $ 50,000 Land 70,000 70,000 0 Total fixed assets $475,000 $525,000 $ 50,000 Goodwill and patents 30,000 50,000 20,000 TOTAL ASSETS $800,000 $920,000 $120,000 Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 10-6A

Bates & Associates’ Manufacturing Balance Sheets Debt (Liabilities) 1998 1999 Changes and Equity Current debt: Accounts payable $ 61,000 $ 76,000 $ 15,000 Income tax payable 12,000 15,000 3,000 Accrued wages and salaries 4,000 5,000 1,000 Interest payable 2,000 4,000 2,000 Total current debt $ 79,000 $100,000 $ 21,000 Long-term debt: Long-term notes payable 146,000 200,000 54,000 Total debt $225,000 $300,000 $ 75,000 Common stock $300,000 $300,000 $0 Retained earnings 275,000 320,000 45,000 Total stockholders’ equity $575,000 $620,000 $ 45,000 TOTAL DEBT AND EQUITY $800,000 $920,000 $120,000 Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 10-6B

The Fit of the Income Statement and the Balance Sheet Reports the profits from January 1, 1999 through December 31, 1999 Income Statement for 1999 Balance Sheet December 31, 1998 Reports the financial position as of December 31, 1998 Balance Sheet December 31, 1999 Reports the financial position as of December 31, 1999 Time Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 10-7

A Firm’s Cash Flows = Investments in fixed assets and other assets net operating working capital Firm’s cash flow After-tax cash flows from operations = Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 10-8

Bates & Associates’ Measurement of Cash Flows Step 1: Compute after-tax cash flows from operations: Operating income (EBIT) $100,000a Depreciation 28,000a Earnings before interest, tax, $128,000 depreciation, and amortization (EBITDA) Tax expense $20,000a Change in income tax payable 3,000b Cash tax payments 17,000 After-tax cash flows from operation $111,000 Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing a Figure from income statement b Figure from balance sheets 10-9A

Bates & Associates’ Measurement of Cash Flows Step 2: Compute the change in net operating working capital: Change in cash $ 5,000b Change in accounts receivable 8,000b Change in inventories 35,000b Change in prepaid expenses 2,000b Changes in current assets $50,000 Change in accounts payable $15,000b Change in accrued wages 1,000b Change in non-interest-bearing current $16,000 operating liabilities Change in net operating working capital $34,000 Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing a Figure from income statement b Figure from balance sheets 10-9B

Bates & Associates’ Measurement of Cash Flows Step 3: Calculate the change in fixed assets and other assets: Gross purchase price of fixed assets $ 78,000b Net cash used for investments in other assets 20,000b Change in long-term assets 98,000 Firm’s cash flows ($ 21,000) Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing a Figure from income statement b Figure from balance sheets 10-9C

The Purpose of Pro Forma Financial Statements The purpose of pro forma financial statements is to answer three questions: 1. How profitable can the firm be expected to be, given the projected sales levels and the expected sales expense relationships? 2. What will determine the amount and type of financing (debt or equity) to be used? 3. Will the firm have adequate cash flows? If so, how will they be used; if not, where will the additional cash come from? Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 10-10

Oakcrest Products, Inc., Projected Income Statements Year 1 Year 2 Sales $250,000 $400,000 Line 1 Cost of goods sold: Fixed costs $100,000 $100,000 Line 2 Variable costs (20% of sales) __50,000 _ 80,000 Line 3 Total cost of goods sold $150,000 $180,000 Line 4 Gross profits $100,000 $220,000 Line 5 Operating expenses: Fixed expenses $ 50,000 $ 50,000 Line 6 Variable expenses (30% of sales) __75,000 _120,000 Line 7 Total operating expenses $125,000 $170,000 Line 8 Operating profits ($ 25,000) $ 50,000 Line 9 Interest expense (12% interest rate) 12,000 12,000 Line 10 Earnings before taxes ($ 37,000) $ 38,000 Line 11 Taxes (25% of earnings before taxes) 0 9,500 Line 12 Net income ($ 37,000) $ 28,500 Line 13 Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 10-11

Sales-Assets-Financing Relationships Increases in asset requirements Increases in financing requirements Increases in sales Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 10-12

Practical Forecasting 1. Don’t stretch to reach your numbers; be factual and conservative. 2. Remember: Only the most astonishing changes in a business or a market can justify a sudden, rocket-like performance. 3. Build projections quantitatively from clear assumptions. 4. Document the reasoning behind each projection in a written list of assumptions. 5. Use industry-specific data to guide your projections of sales and expenses. 6. Remember: Projections are immediately suspect if sales or profit margins are significantly higher or lower than the industry average. 7. Check pro forma statements against actual results at least once a month. Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 10-13

BizPlanBuilder Spreadsheet Templates (p. 192) Using your spreadsheet processor, you edit the templates with your own financial data. There are two ways to generate financial statements: Integrated financials spreadsheet Basic spreadsheets Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 10-14

BizPlanBuilder Recommendation for Making Financial Projections (p. 207) You may want to prepare not only one set of projections, but three. They should include a pessimistic (worst case) scenario and a realistic (most likely) scenario. In this way, you will have a true picture of your potential for gain and loss. While the best case is what you hope for, the worst case is what you need to be prepared for; in the meantime, the most likely case will be the basis for many of your decisions. Small Business Management, 11th edition Longenecker, Moore, and Petty 2000 South-Western College Publishing 10-15