CHAPTER 16 FINANCIAL ANALYSIS OF A BUSINESS

HOW DO YOU JUDGE THE SUCCESS OF A BUSINESS?

WHY DO MOST BUSINESS FAIL: POOR FINANCIAL MANAGEMENT

SUCCESSFUL FINANCIAL MANAGEMENT DEPENDS ON: KEEPING THOROUGH AND ACCURATE RECORDS PREPARING IMPORTANT FINANCIAL REPORTS REGULARLY INTERPRETING FINANCIAL INFORMATION IN THE REPORT MAKING DECISIONS THAT AFFECT FUTURE FINANCIAL REPORTS

FINANCIAL STATEMENTS Report that summarizes financial data over a period of time (month(s), year, life of business)

FINANCIAL REPORTS USED: INCOME STATEMENT BALANCE SHEET

BALANCE SHEET Financial report that lists assets, liabilities, and capital of a business on a specific date

ASSETS anything of value owned (cash, equipment, building, inventory) LIABILITIES claims against assets – debt – what is owed (mortgage, money owed for purchases on credit) CAPITAL amount organization/individual is worth after subtracting liabilities from assets

TOTAL ASSETS MUST EQUAL TOTAL LIABIITIES + CAPITAL CROWN CORPORATION Balance Sheet December 31, 2005 LIABILITIES ASSETS Cash $24,000 Equipment 8,000 Land & Bldg. 64,000 Accounts Payable $10,000 Mortgage Payable 33,000 Total Liabilities $43,000 CAPITAL Net Worth $53,000 Total Assets $96,000 Total Liabilities & Capital $96,000 TOTAL ASSETS MUST EQUAL TOTAL LIABIITIES + CAPITAL

BALANCE SHEET SHOWS THE FINANCIAL CONDITION OF A BUSINESS AT A PARTICULAR POINT IN TIME

Starboard Corporation BALANCE SHEET April 20, 2011 ASSETS Cash $ 5,000 Accounts Receivable 8,000 Merchandise Inventory 15,000 Land and Buildings 120,000 Total Assets $148,000 LIABILITIES Accounts Payable $ 12,000 Mortgage Payable 90,000 Total Liabilities 102,000 CAPITAL James Jones, Net Worth 46,000 Total Liabilities & Capital $148,000

INCOME STATEMENTS

Financial statement that reports total revenue and expenses INCOME STATEMENTS Financial statement that reports total revenue and expenses for a specific period such as a month or year.

THREE MAJOR PARTS TO INCOME STATEMENT: 1.REVENUE Income earned for the period 2. EXPENSES All costs incurred in operating the business 3. PROFIT OR LOSS Difference between total revenues and total expense

IF REVENUES GREATER THAN EXPENSES – COMPANY EARNED A PROFIT IF EXPENSES GREATER THAN REVENUE – COMPANY INCURRED A LOSS

INCOME STATEMENT Profit or Loss for specific period of time: year or less BALANCE SHEET Financial condition of business as of a specific date

FOR THE YEAR ENDING DECEMBER 31, 2005 $100,000 40,000 $60,000

Movement of cash into and out of a business CASH FLOW Movement of cash into and out of a business

WORKING CAPITAL DIFFERENCE BETWEEN CURRENT ASSETS AND CURRENT LIABILITIES

WOULD YOU LEND MONEY TO THIS BUSINESS? CURRENT ASSETS = $80,000 CURRENT LIABILITIES = 30,000 WORKING CAPITAL =

FOR THE YEAR ENDING DECEMBER 31, 2005 HOOVER CORPORATION INCOME STATEMENT FOR THE YEAR ENDING DECEMBER 31, 2005 Revenue from Sales $40,000 Cost of Goods Sold 27,000 Gross Profit $13,000 Operating Expenses: $ 8,000 Total Operating Expenses: 8,000 Net Profit $ 5,000

FOR YEAR ENDING DECEMBER 31, 2006 HOOVER CORPORATION INCOME STATEMENT FOR YEAR ENDING DECEMBER 31, 2006 Revenue from Sales $40,000 Cost of Good Sold 27,000 Gross Profit $13,000 Operation Expenses $ 8,000 Total Operating Expenses 8,000 Net Profit $ 5,000

JANICE JONES BALANCE SHEET APRIL 17, 2007 ASSETS LIABILITIES CASH $125.00 ACCOUNTS PAYABLE $ 700.00 CLOTHING 450.00 VCR, RADIO, TAPES 600.00 CAPITAL SVGS. ACCOUNT 700.00 JANICE JONES, CAPITAL 1,375.00 CHECKING ACCOUNT 200.00 TOTAL ASSETS $2,075.00 TOTAL LIABILITIES & CAPITAL $2,075.00