1. Understanding Financial Statements

2. What are financial statements?
The summarized results of your business financial transactions over a designated period of time.
They will show total income, expenses, cash balances, level of debt, and much more.
But where does this information come from?

3. Accounts
Accounts are the categories into which the effects of transactions are recorded, and from which financial reports are created.
5 major account categories:
The Income and Expense accounts measure business operations – what’s going in and out of the business.
The Assets, Liabilities, and Equity accounts measure financial position.
Income
Proceeds from sales
Expenses
Costs of operation
Assets
What you own
Liabilities
What you owe
Equity
Net worth / level of investment
Operations
Financial Position

4. Chart of Accounts Sample Income accounts Sales revenue Other income
Sample Expense accounts
Rent
Cost of Goods Sold (COGS)
Marketing
Office supplies
Payroll
Professional fees
Sample Asset accounts
Current assets
Cash
Inventory
Accounts receivable
Fixed assets
Equipment
Property
Sample Liability accounts
Accounts payable
Credit card payable
Loan payable
Sample Equity accounts
Owner’s equity
Retained earnings
Within each major account category, you’ll have sub-accounts to further classify your transactions by type of account. Here are some examples of common sub-accounts. Every business will use different account categories, though businesses in the same industry will likely have the same. Your master list of what accounts (categories) you use is called your chart of accounts. Keep it simple, though – you don’t want a million accounts – just the main ones.
Like bank accounts, each of these accounts will have transactions posted to it and will maintain a running balance that is the sum of all the transactions that have been posted to them.
Explain what kind of other income a company might have besides revenue.
Define COGS and why it may be indicated separately from other type of expenses (but that we are not getting into inventory accounting today)
Explain the difference between current and fixed assets
Define accounts receivable and accounts payable.
Define retained earnings as the cumulative net profit of the business.

5. * today’s class will focus on the income statement and balance sheet
Financial Statements
Income Statement*
Balance Sheet*
Statement of Cash Flow
* today’s class will focus on the income statement and balance sheet
Each has different information and tells a different story.

6. Income Statement / Profit & Loss Statement (P&L)
My company Income Statement
For the month of August 2008
Income
Sales revenue $2,000
Expenses
rent $ 850
utilities
payroll
insurance
marketing
Total expenses ,600
Profit/Loss $400
Shows the performance of your business over a period of time
Resets at the beginning of each new accounting period
Summarizes all revenue generated by the business
Summarizes all expenses incurred by the business (by category)
Calculates the net profit or loss, or “bottom line” = Income – Expenses
Tells you how well your business is operated

7. Reviewing your income statement
How is your revenue trending?
Month-to-month
Against same period last year (considers seasonality)
How are your expenses trending?
What are your highest categories of expenses?
Which expenses are fixed vs. variable?
What is your cost of goods sold?
How do your expenses (as a % of sales) compare to others in your industry?
Review a sample income statement – talk about the different sections.
So, what should you look for when reviewing?
Have them spend some time analyzing the numbers and coming to conclusions of their own.

8. Reviewing your income statement will tell you…
Are you profitable?
What’s your profit margin?
Profit / Sales
What’s your gross profit margin?
(Sales – COGS) / Sales

9. My company Balance Sheet
Shows a snapshot of your business at a point in time
Accumulates over the lifetime of your business
Shows the net worth of your business
The balance sheet always balances ASSETS – LIABILITIES = EQUITY
My company Balance Sheet
As of August 31, 2008
Assets:
Cash ,000
Accounts Receivable
Inventory
Equipment ,000
Total Assets ,500
Liabilities:
Accounts Payable
Loan Payable ,500
Total Liabilities ,400
Equity:
Owner’s equity ,700
Retained earnings
Total Equity ,100
Explain current vs long-term assets and liabilities.

10. Link between balance sheet and income statement
Profit or loss is taken from the bottom line of the income statement and recorded on the balance sheet in the Retained Earnings equity account. Retained earnings accumulate over the life of the business.
When a business operates at a profit, it increases in equity (is worth more)
When a business operates at a loss, it decreases in equity (is worth less)

11. Reviewing your balance sheet
Liquidity: Can your company meet its payment obligations?
Cash balance
Working capital: Current assets – Current liabilities
Current ratio: Current assets / Current liabilities
Cash flow management
How much inventory do you have? How fast are you selling it?
Is your inventory on the shelf collecting dust and interest?
Are you doing physical inventories monthly, annually, never?
Inventory turns: (COGS / Inventory balance)
How high is your accounts receivable balance? How quickly are you collecting it?
Days sales outstanding: (AR / Sales) * # of days in period
This is related to cash flow as well.
Inventory is Black and White. Not gray like marketing or sales…

12. Reviewing your balance sheet
Debt management
What are your total debt obligations?
What is your total equity in the business?
How leveraged is your company?
Debt-to-equity ratio: Total liabilities / Total equity

13. Food Truck Financing Assignment
Here’s the Story: The year is 2025 and you just inherited 30,000 dollars from a long lost relative. You decide to take the money and follow your passion, and open up a food truck. You head to the #1 Food Truck City in the World, Orlando, Florida. Before you start serving some grub, you have to figure out a few things though using the internet.
What is the name of your Food Truck and what do you serve?
Give some examples of start-up costs related to a food truck business?
What are some examples of operating costs related to a food truck?
What does the average food truck cost? Knowing you only have 30,000 dollars, how will you plan to finance the truck and why?
What other items would you need to finance to start up the food truck?
How much would you typically pay someone to work a food truck an hour?
What is the average cost to operate a food truck in the United States (in 2018)?
If you decided to open up another food truck, what are 3 groups you could borrow money from? Which would you prefer and why?