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

2. 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

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

4. 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)

5. 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

6. 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

7. 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.