POB 4.01 Part 3 – Income Statements & Balance Sheets 4.01 Understand financial planning.

Elements of Financial Strength Assets: what the company owns Liabilities: what the company owes Owner’s Equity: value of owner’s investment in the business Financial Statements: reports that sum up the performance of the business Balance sheets Income statements

Balance Sheet Balance Sheet: shows assets, liabilities, and owner’s equity for a specific date Usually done every 6 months or yearly

Balance Sheet Parts Assets: anything of value owned by the business Current: cash and items readily converted to cash (inventory, accounts receivable) Long-Term (aka “fixed”): lifespan of more than one year (land, buildings, equipment, technology) Liabilities: amounts owed by the business to others Current: will be paid within 1 year (short-term loans, inventory, supplies, and inexpensive equipment) Long-Term: debts that will continue for more than 1 year (buildings, land, expensive equipment)

Income Statement Income Statement: report of revenue, expenses and net income or loss from operations for a specific period of time Often for a 6 month period or 1 year

Income Statement Parts Revenue: all income that is received by the business during the time period Sources: sale of products, interest earned on investments Expenses: all the costs incurred by the business during the time period Ex: operations, purchase of equipment, inventory, supplies, as well as payroll and taxes Net Income: when revenue > expenses Net Loss: when expenses > revenue

Why are financial statements important? Compare your business performance from year- to-year Compare your business to similar businesses to assess your ability to compete When assets are rising you have the ability to invest in new products, buildings and equipment When liabilities are increasing or when expenses go up while revenue goes down, the business needs to evaluate why the situation is occurring.