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11 FINANCIAL STATEMENTS Section 11.1 Income Statements & Cash Flow
Section 11.2 The Balance Sheet
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Time Period Calendar Year – January 1 – December 31
Fiscal Year – any year long time period BCS – July 1 – June 30 Most Small Businesses – March 1- February 28 Why?
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Income Statements An income statement is a financial document that summarizes a business’s income and expenses over a given time period and shows whether the business made a profit or took a loss. Income statements are prepared periodically to show how a business is performing: Monthly Quarterly Annually Income statements differ in how they show their variable expenses. They may appear under: Cost of Goods Sold Cost of Goods Manufactured and Sold Cost of Services Sold
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Parts of a Typical Income Statement
Income statements generally include these parts: Revenue. The money the business receives from selling products or services. Cost of Goods/Services Sold. The cost of producing the goods or services. Gross Profit. Net sales minus the cost of goods sold. Operating Expenses. The expenses of running the business. Pre-Tax Profit. Gross profit minus the operating expenses. Net Profit (Loss). Pre-tax profit minus taxes.
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Preparing Income Statements
To prepare an income statement: Determine the business's Revenue. Units sold x Selling price Calculate the Cost of Goods Sold. Page 298. Per unit Determine the Gross Profit. (= line1.- line 2.) Calculate Operating Expenses. Page 295. Determine the Pre-Tax Profit. (= line 3.- line 4.) Determine the Net Profit or Loss. (= line 5.- Taxes.)
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Traditional-Format Income Statement
The traditional-format income statement subtracts the Cost of Goods Sold from the Net Sales to determine the Gross Profit. COGS subtracted from Net Sales
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Contribution-Margin-Format Income Statement
The contribution-margin-format income statement subtracts all the variable expenses from the Net Sales to determine the Contribution Margin. Total Variable Expenses subtracted from Net Sales
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Cash Inflow – Cash Outflow = Net Cash
Cash Flow Cash flow is the money received minus what is spent over a specified period of time. The cash flow equation is: A cash flow statement is a financial document that records inflows and outflows of cash when they actually occur. Cash Inflow – Cash Outflow = Net Cash
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Ways to Keep Cash Flowing
Five ways to avoid being caught without enough cash to pay your bills are: Collect Cash as Soon as Possible Pay Bills Close to the Due Date Keep Track of Your Cash Lease Equipment Keep Inventory to a Minimum Cash flow is cyclical for many businesses, meaning that it varies according to the time of year.
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Projected Cash Flow Statement
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Annual Income Statement
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Cash on Hand ÷ Burn Rate = Number of Months before
The Burn Rate The rate at which a company spends cash to cover overhead costs without generating a positive cash flow is called the burn rate. Use the burn rate to calculate how long a company can go without revenue. Cash on Hand ÷ Burn Rate = Number of Months before Cash Runs Out
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11.2 The Balance Sheet Identify the purpose and components of a balance sheet Explain how balance sheets are prepared Provide two methods used to analyze balance sheets
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Assets – Liabilities = Owner’s Equity
What Is a Balance Sheet? A balance sheet is a financial statement that summarizes the assets and liabilities (debts) of a business. The balance sheet focuses on the fundamental accounting equation: Assets include everything owned by the business that has a monetary value. Liabilities include any outstanding bill or loan that must be repaid. The value of the business on a specific date is referred to as the owner’s equity. Assets – Liabilities = Owner’s Equity
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What Is a Balance Sheet? Assets are the items of value owned by a business. Short-term assets that can be converted into cash within one year are current assets. Assets that usually take longer than one year to turn into cash are long-term assets. Liabilities are all sums of money owed by the business. Short-term debts that must be repaid within one year are current liabilities. Debts that usually take longer than one year to repay are long-term liabilities.
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Preparing Balance Sheets
Balance sheets are divided into two sections: (1) Assets and (2) Liabilities and Owner’s Equity. To prepare a balance sheet: Determine the value of the company’s assets. Establish the value of the business’s long-term assets. Verify the company’s total liabilities. Determine the value of the business’s long-term assets. Calculate the business's long-term liabilities. Determine the owner’s equity.
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