2. Read to Learn
Identify the six reasons for creating a financial plan.
Explain what a budget is and how it is used.

3. Key Concepts
The Purpose of the Financial Plan
Budgets

4. The Purpose of the Financial Plan
A financial plan can be used to attract investors.
financial plan
a set of documents that outlines the essential financial facts about a new venture
Financial plans project the viability of a new business or a project at an existing firm.

5. Characteristics of an Effective Financial Plan
Identifies the assets that need to be purchased
Describes the amount of money a business needs to start and operate
Describes the expenses the business will incur and explains how a business will cover its expenses
Describes how the business will document and report financial records
Forecasts finances to project future profitability
Explains how the business will acquire money to grow or expand

6. Identifying Business Assets
Information about assets might show that buying used items instead of new ones, or renting them, would be best.
Examples of Assets
Cash
Equipment
Buildings
Supplies
Inventory
Land

7. Determining Needed Capital
A financial plan estimates that amount of capital a business will need.
capital
money supplied by investors, banks, or owners of a business

8. Determining Needed Capital
Start-up capital is the money used to pay for the various assets and expenses of a new venture or business.
A start-up may have a hard time attracting investors because it has no track record.

9. Describing Start-Up and Operating Expenses
Start-up expenses often require a large amount of cash.

10. Examples of Start-Up Expenses Examples of Operating Expenses
Business assets
Remodeling costs
Security deposits
Advertising
Insurance
Supplies
Legal permits
Licenses
Payroll
Rent
Utility bills
Delivery charges
Bank fees

11. Describing Financial Records Management
A financial plan describes who will maintain the financial records and why.
A financial plan also describes any legal agreements that influence the way records are kept.
Special accounting software is available to businesses.

12. Forecasting Future Finances
A financial forecast should be conservative in its outlook.
financial forecast
an estimate of a business’s financial outlook for each of the next few years
A forecast should consider changes in the economy.

13. Describing Growth Financing
Planned growth can be rewarding, while unplanned growth can be chaotic.
Investors want to know that a business has thoughtfully developed strategies to finance controlled growth.

14. A budget helps guide a company’s future.
Budgets
A budget helps guide a company’s future.
budget
a plan specifying how money will be used or spent during a particular period

15. Graphic Organizer Three Types of Budgets Start-Up Budget Cash Budget
Operating Budget
A plan for your income and expenses from the time you start a business to estimated time it will make a profit
A plan for the actual money the business owner spends on a daily, weekly, or monthly basis
A plan for the amount expected to be spent and earned over a given period of time, usually six months or a year

16. What is the purpose of the financial plan?
It is used as an outline of essential financial facts about a new business and to guide a business as well as to secure funding.

17. What does an effective financial plan do?
An effective plan identifies assets, determines needed capital, describes start-up and operating expenses, and describes financial records management, forecasts future finances, and describes growth financing.

18. Why do business owners use a budget?
Budgets help business owners to predict the amount of money the business will need. They also help them to keep track of and control spending.

19. Key Term
a set of documents that outlines the essential financial facts about a new venture
financial plan
money supplied by investors, banks, or owners of a business
capital

20. Key Term
financial forecast
an estimate of a business’s financial outlook for each of the next few years
a plan specifying how money will be used or spent during a particular period
budget

21. Read to Learn
Explain the purpose of accounting.
Describe how property rights are measured.
Define the three components of the accounting equation.
Describe the three main financial statements used by businesses.

22. Key Concepts
Accounting for Business
Property Ownership and Control
Financial Statements

23. Accounting for Business
Many companies hire accounting firms to manage or audit their financial records.
accounting
the systematic process of recording and reporting the financial position of a person or an organization

24. Accounting for Business
Accounting is often called the “language of business.”
Everyone involved in a business should understand the basics of accounting.

25. Accounting for Business
An accountant maintains and reviews business records.
An audit is a review of accounting records and procedures.

26. Rules for Accountants
Each company sets up an accounting system according to its specific needs, but all businesses follow generally accepted accounting principles (GAAP).
generally accepted accounting principles (GAAP)
the set of accounting rules used by accountants to prepare reports

27. Questionable Accounting
Some companies have gotten into legal trouble for committing accounting fraud. Fraud is the crime of intentionally deceiving others for financial gain or some other benefit.

28. Enron: The Fall of a Wall Street Darling
Enron Clip

29. Enron: The Fall of a Wall Street Darling

30. Enron: The Fall of a Wall Street Darling

31. Enron: The Fall of a Wall Street Darling

32. Enron: The Fall of a Wall Street Darling

33. The accounting system is designed to generate financial statements.
documents that summarize the changes resulting from business transactions that occur during an accounting period

34. Financial Statements
Financial statements provide information that business owners use to make financial decisions.

35. Financial Statements
Stockholders, employees, banks, and investment companies use financial statements to learn about the financial conditions of a business.
Corporations must release their financial statements to the public.

36. Property Ownership and Control
The right to own property is basic to a free enterprise system.
property
anything of value that is owned or controlled
Accounting provides financial information about property and rights to it.

37. Financial Claims in Accounting
Land and equipment are examples of assets.
assets
property and other items of value owned by a business

38. Financial Claims in Accounting
Current assets include cash, supplies, merchandise, and accounts receivable.
current assets
assets that are either used up or converted to cash during the normal cycle of the business
accounts receivable
the total amount of money owed to a business

39. Financial Claims in Accounting
Equipment and buildings are examples of fixed assets.
fixed assets
items of value that will be held for more than one year

40. Financial Claims in Accounting
The accounting term for the financial claims to all assets is equity.
equity
the present value of an asset less all claims against it

41. Financial Claims in Accounting
When a person or business buys property and agrees to pay for it later, they are buying on credit.
The business or person selling the property is called the creditor.

42. Financial Claims in Accounting
Liabilities are measured by the amount of money a business owes its creditors.
liabilities
creditors’ claims to the assets of a business

43. Financial Claims in Accounting
Owner’s equity is also referred to as the owner’s capital.
owner’s equity
an owner’s claim to the assets of a business

44. The Accounting Equation
The accounting equation ensures that all accounting records will be correct.
accounting equation
a rule that states that assets must always equal the sum of liabilities and owner’s equity

45. The Accounting Equation
Graphic Organizer
The Accounting Equation
Assets
Liabilities
Owner’s Equity = +
Example
Company Assets: $100,000
Liabilities: $40,000
Owner’s Equity:
$60,000 = +
The owner’s rights to the assets that the owner possesses.

46. Balance Sheet
A balance sheet is like a photograph of a business’s finances at a specific moment.
balance sheet
a report of the balances in all assets, liabilities, and owner’s equity accounts at the end of an accounting period

47. Balance Sheet
The balance sheet applies the accounting equation.
When added up, the two sides of the equation are equal, or in balance.

48. Balance Sheet
Assets
Liabilities
Owner’s
Equity

49. The income statement is sometimes called a profit and loss statement.
Income Statements
The income statement is sometimes called a profit and loss statement.
income statement
a report of the revenue, expenses, and net income or net loss over an accounting period

50. Income Statements Net income Net loss
Total revenue is greater than total expenses
Total revenue is less than total expenses
Net income
Net loss $

51. Income Statement
Revenues
Expenses
Net Income
Net Loss

52. Statement of Cash Flows
Cash flows are not indicated in the income statement or the balance sheet.
cash flows
the money that is available to a business at any given time

53. Statement of Cash Flows
The statement of cash flows helps managers ensure that the business does not run out of money.
statement of cash flows
a financial report that shows incoming and outgoing money during an accounting period

54. Statement of Cash Flows
Lenders and investors expect business loan applicants to be able to show a consistently positive cash flow.

55. Statement of Cash Flows
Operating
Investing
Financing

56. Computerized Accounting
Most companies use computer programs to simplify their accounting procedures because they are efficient at organizing and analyzing data.

57. Graphic Organizer
As you create a spreadsheet, you enter numbers, labels, and formulas into cells.

58. Income Statement Using Peachtree Software
Figure 17.1
Income Statement Using Peachtree Software

59. Balance Sheet Using QuickBooks® Software
Figure 17.2
Balance Sheet Using QuickBooks® Software

60. How does accounting help a business?
Accounting keeps track of money and shows how a business is doing.

61. Discuss property ownership and control
Discuss property ownership and control. How are they related to the accounting equation?
The person who owns property has a financial claim to it. The accounting equation indicates the amounts of financial claims to property.

62. What are the three main financial statements used in business?
balance sheet, income statement, and statement of cash flows

63. Key Terms
the systematic process of recording and reporting the financial position of a person or an organization
accounting
generally accepted accounting principles (GAAP)
the set of accounting rules used by accountants to prepare reports

64. Key Term
anything of value that is owned or controlled
property
property and other items of value owned by a business
assets

65. Key Term
assets that are either used up or converted to cash during the normal cycle of the business
current assets
accounts receivable
the total amount of money owed to a business

66. Key Term
fixed assets
items of value that will be held for more than one year
the present value of an asset less all claims against it
equity

67. Key Term
creditors’ claims to the assets of a business
liabilities
accounts payable
the short-term liabilities that a business owes to creditors

68. Key Term
owner’s equity
an owner’s claim to the assets of the business
a rule that states that assets must always equal the sum of liabilities and owner’s equity
accounting equation

69. Key Term
documents that summarize the changes resulting from business transactions that occur during an accounting period
financial statements
a report of the revenue, expenses, and net income or net loss of an accounting period
income statement

70. Key Term
a report of the balances in all assets, liabilities, and owner’s equity accounts at the end of an accounting period
balance sheet
cash flows
the money that is available to a business at any given time

71. Key Term
a financial report that shows incoming and outgoing money during an accounting period
statement of cash flows