Understanding the Key Financial Statements Balance Sheet Represents the financial condition of a company at a certain date. It details the items the company owns (assets) and the amount the company owes (liabilities). It also shows the net worth of the company and its liquidity. Assets = Liabilities + Owners’ Equity An asset is something of value the business owns. Current and fixed assets Liabilities are the claims creditors have against the company. Short- and long-term debt Owners’ equity is the residual interest of the firm’s owners in the company. © 2007 Thomson/South-Western. All rights reserved.

Table 10.2 Kendon Corporation Balance Sheet for the Year Ended December 31, 2006 © 2007 Thomson/South-Western. All rights reserved.

Understanding the Key Financial Statements (cont’d) Income Statement Commonly referred to as the P&L (profit and loss) statement from activities of the firm. Provides the results of the firm’s operations. Income Statement Categories Revenues: gross sales that the business made for the period Expenses: Costs associated with producing goods or services Net Income: The excess (deficit) of revenues over expenses (profit or loss) © 2007 Thomson/South-Western. All rights reserved.

Table 10.3 Kendon Corporation Income Statement for the Year Ended December 31, 2006 © 2007 Thomson/South-Western. All rights reserved.

Understanding the Key Financial Statements (cont’d) Statement of Cash Flow An analysis of the cash availability and cash needs of the business that shows the effects of a company’s operating, investing, and financing activities on its cash balance. How much cash did the firm generate from operations? How did the firm finance fixed capital expenditures? How much new debt did the firm add? Was cash from operations sufficient to finance fixed asset purchases? The use of a cash budget may be the best approach for an entrepreneur starting up a venture. © 2007 Thomson/South-Western. All rights reserved.

Table 10.4 Format of Statement of Cash Flows © 2007 Thomson/South-Western. All rights reserved.

Preparing Financial Statements Budget One of the most powerful tools the entrepreneur can use in planning financial operations. Operating Budget A statement of estimated income and expenses over a specified period of time. Cash Budget A statement of estimated cash receipts and expenditures over a specified period of time. Capital Budget The plan for expenditures on assets with returns expected to last beyond one year. © 2007 Thomson/South-Western. All rights reserved.

The Operating Budget Forecasting Creating an operating budget through preparation of the sales forecast. Linear regression: a statistical forecasting technique. Y = a + bx Y is a dependent variable—its value is dependent on the values of a, b, and x. x is an independent variable that is not dependent on any of the other variables a is a constant. b is the slope of the line of correlation (the change in Y divided by the change in x). © 2007 Thomson/South-Western. All rights reserved.

Figure 10.1 Regression Analysis © 2007 Thomson/South-Western. All rights reserved.

Table 10.5 Wheatman’s Market: Sales Forecast for 20XX ($000) © 2007 Thomson/South-Western. All rights reserved.

Table 10.7 General Widgets: Production Budget Worksheet for 20XX ($000) © 2007 Thomson/South-Western. All rights reserved.

Pro Forma Statements Pro Forma Statements Projections of a firm’s financial position over a future period (pro forma income statement) or on a future date (pro forma balance sheet). Using beginning balance sheet balances, the projected changes depicted on the operating and cash-flow budgets are added to create the projected balance sheet totals. © 2007 Thomson/South-Western. All rights reserved.

Table 10.10 Wheatman’s Market: Pro Forma Statements © 2007 Thomson/South-Western. All rights reserved.

Table 10.10 Wheatman’s Market: Pro Forma Statements (cont’d) © 2007 Thomson/South-Western. All rights reserved.