CHAPTER 16 FINANCIAL ANALYSIS OF A BUSINESS

HOW DO YOU JUDGE THE SUCCESS OF A BUSINESS? ______________________________________

WHY DO MOST BUSINESSES FAIL? (SLIDE 3-6) __________________________

SUCCESSFUL FINANCIAL MANAGEMENT DEPENDS ON: (SLIDE 7) KEEPING ______________AND _______________RECORDS. PREPARING IMPORTANT FINANCIAL REPORTS ___________________. __________________FINANCIAL INFORMATION IN THE REPORT. _____________________THAT AFFECT FUTURE FINANCIAL REPORTS.

What question is a business owner looking to answer? (SLIDE 10) FINANCIAL STATEMENTS By definition, (SLIDE 8) _____________________________________________________________________________. What question is a business owner looking to answer? (SLIDE 10) _______________________________________________________________?

TYPES OF FINANCIAL STATEMENTS(SLIDE 11) ______________________which reports on a company’s __________, ______________, and _______________ as of a given point in time. ______________________ reports on a company’s ________________________ over a period of time. ______________________which reports on its________________, ________________ and ____________________activities. ___________________________ which explains __________ in a company’s retained earnings over the reporting period.

BALANCE SHEET (SLIDE 13) Defined as: __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________. FORMULA: ___________________________________________________________

PARTS OF A BALANCE SHEET (SLIDE 14) ASSETS(LEFT SIDE) _________________________ ___________________________________________. ex:________________________________ LIABILITIES (RIGHT SIDE) ____________________ ___________________________________________ ex:___________________________________ CAPITAL (RIGHT SIDE) _________________________________________________________________________________________.

_______________ ____________

Anything OWNED by the business Anything OWED by the business CROWN CORPORATION Balance Sheet December 31, 2008 ASSETS Cash $24,000 Equipment 8,000 Land & Bldg. 64,000 LIABILITIES Accounts Payable $10,000 Mortgage Payable 33,000 Total Liabilities $43,000 CAPITAL James Jones, Net Worth $26,500 Tom Erwin, Net Worth 26,500 Total Capital $53,000 Total Liabilities & Capital $96,000 Total Assets $96,000 TOTAL ASSETS MUST EQUAL TOTAL LIABIITIES + CAPITAL Anything OWNED by the business Anything OWED by the business

ANALYSIS OF THIS BALANCE SHEET FOR CROWN CORPORATION (Slide 17) Positive or negative net worth?______________ Why?__________________________________ 2) Is it possible to have a negative net worth?______ IF_______________________________________ ex: not making enough profits to cover expenses ex: have a lot of obsolete inventory in computers I am selling. Price has dropped drastically below what I paid for them and I am losing money selling below my cost so eventually will have a net loss---might have to get rid of my inventory) and hopefully can generate enough money to cover losses and make profit--get out of computer business--go to some other line.)

IN REVIEW: (SLIDE 18) BALANCE SHEET ______________________________________________________________________ BALANCE SHEETS ARE PREPARED AT LEAST __________________. WHAT DO THEY PROVIDE? _____________________________________________________________________.

Starboard Corporation BALANCE SHEET April 16, 2007 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 20

INCOME STATEMENTS 1

(aka__________________________) INCOME STATEMENTS (aka__________________________) By definition, _______________________________________________________________________________________________________________________________________________________________. 2

THREE MAJOR PARTS TO INCOME STATEMENT: 1. ________________________ _______________________________ 2. _______________________ _________________________________________________________________. 3. _____________________ 3

IF REVENUES GREATER THAN EXPENSES – COMPANY EARNED A _______. IF EXPENSES GREATER THAN REVENUE – COMPANY INCURRED A______. 4

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WHAT IS THE DIFFERENCE BETWEEN AN INCOME STATEMENT AND A BALANCE SHEET INCOME STATEMENT Shows _______________________________ of time: year or less. Shows the ___________________________ as of a specific date. 6

FOR THE YEAR ENDING DECEMBER 31, 2008 or Net Loss $100,000 40,000 $__________ 7

REFERRING TO THE XYZ CORPORATION INCOME STATEMENT 1. WAS THIS INCOME STATEMENT DONE FOR A QUARTER, 6 MONTHS, OR FOR A YEAR?_____________ 2. WHAT REPESENTS THE TOTAL INCOME FROM GOODS THE XYZ CORPORATION SOLD?_____________ 3. WHAT REPRESENTS WHAT XYZ CORPORATION PAID FOR THE MERCHANDISE IT SOLD?___________ 4. WHAT REPRESENTS PROFIT FROM THE SALE BEFORE EXPENSES?_________________________ WHAT REPRESENTS THE COST OF OPERATING THE BUSINESS DURING THE YEAR?_______________ IF MY GROSS PROFIT IS GREATER THAN MY EXPENSES, I HAVE _______________________________. 7. IF MY EXPENSES ARE GREATER THAN MY GROSS PROFIT, I HAVE ______________________________. 8

Movement of cash into and out of a business CASH FLOW Movement of cash into and out of a business (ex: checkbook – deposit money, pay bills by writing checks) You work at McDonalds, making $320/month. You owe $400/month for car insurance. Positive or negative cash flow?________ How much?______________ 9

WORKING CAPITAL DIFFERENCE BETWEEN CURRENT ASSETS AND CURRENT LIABILITIES 10

It can be converted to cash within a year. CURRENT It can be converted to cash within a year. 1. When a company purchases goods on credit, it expects to pay its bill within a year – Current Liability – Accounts Payable. 2. When a company sells goods on credit, it expects to be paid within a year – Current Asset – Accounts Receivable. 11

WOULD YOU LEND MONEY TO THIS BUSINESS? CURRENT ASSETS = $80,000 CURRENT LIABILITIES = 30,000 WORKING CAPITAL = $______ Do corporations with a larger working capital find it easier or harder to borrow money?_________ 12