Welcome to Financial Series #2 The Balance Sheet

Your Hosts for Today’s Conference are: Gary Elekes in Nashville, Tennessee Gary Oetker in Plano, Texas

Conference Objectives: Review Balance Sheet fundamentals. Review the key components of the Balance Sheet and the critical information needed to manage a company. Review how inventory, depreciation, warranty reserve and service agreement reserve transactions affect Balance Sheet

Agenda for Conference Review the basic layout and terminology of the Balance Sheet Review the Balance Sheet equation Review depreciation transactions Review inventory transactions Review warranty reserve transactions Review service agreement reserve transactions Review key points in using the Balance Sheet as a tool to manage company performance

Beginning Terminology Assets Current Assets Fixed Assets Liabilities Current Liabilities Long-Term Liabilities Net Worth (Owner’s Equity)

The Balance Sheet ASSETS = LIABILITIES + NET WORTH Basic Equation: ASSETS = LIABILITIES + NET WORTH Or ASSETS - LIABILITIES = NET WORTH

Balance Sheet Example

Balance Sheet Format Current Asset Accounts Current Liabilities Cash Accounts Receivable Notes Receivable Inventory Work In Process Prepaid Expenses Other Current Assets Fixed Assets Property, Plant & Equipment Vehicles Improvements on Leased Building Less: Accumulated Depreciation Current Liabilities Accounts Payable Notes Payable Current Portion of Long-Term Debt Accrued Expenditures Reserve Accounts Customer Deposits Other Current Liabilities Long Term Liabilities Mortgages Payable Bonds Payable Long Term Notes Payable Stockholder Equity Capital Stock Retained Earnings

Sample Balance Sheet

Sample Balance Sheet (cont.)

Special Balance Sheet Transactions Depreciation Inventory Reserve Accounts Warranty Reserve Service Agreement Reserve Start-Up Reserve

Depreciation Depreciation Accounts Depreciation Methods Depreciation Expense Accumulated Depreciation Depreciation Methods Straight Line Depreciation Accelerated Depreciation

Depreciation Flow Example At The End Of The Year Part Of The Trucks Useful Life Is Over At The End Of The Year The Income Statement Includes Annual Depreciation Expense Of Truck Company Purchases Truck

Inventory Flow Example Equipment Is Purchased For Warehouse Equipment Is Then Used On A Job The Cost Is Placed Into The Inventory Account The Income Statement Shows Revenue For Job And The Cost Of Sale The Cost Is Transferred To Cost Of Sales - Equipment

Warranty Reserve Recognizes the liability associated with an equipment sale (1 year labor) At the time of sale: Warranty is a cost of sales line item Generally dollar amount is calculated as a percentage of the sale Money is transferred to warranty reserve account on Balance Sheet

Warranty Reserve (cont) When warranty work is performed: Expenses are charged to a warranty labor and a warranty parts expense accounts. Warranty part credits are credited to the warranty parts expense account when they’re received. At the end of the month the warranty reserve account is adjusted to balance the warranty expense accounts. It should be a wash.

Warranty Reserve (cont) Think of the warranty reserve account as a bucket If the bucket runs dry, you’re warranty costs are higher than what you planned for. You’ll need to increase the warranty amount set aside on each job. If you’re warranty costs come in less than expected, the bucket will be full and overflowing. At the end of the year, you’ll need to make adjustments to recognize this additional gross margin.

Using the Balance Sheet To determine what the warranty reserve should be To determine what the service agreement reserve should be To determine the value of your company To determine how company profits compare to the owner’s investment The Income Statement focuses on company profitability. The Balance Sheet focuses on the overall health of the company. The Balance Sheet provides key financial information for management in terms of financial ratios.

Other Financial Ratios are covered in another Coaching Conference Working Capital Net Working Capital Current Assets Current Liabilities = - Working Capital should equal 10% of annual sales Profits retained in a company provide the working capital needed for growth A lack of Working Capital can create cash flow problem Other Financial Ratios are covered in another Coaching Conference

Questions & Answers