1. Understanding the Key Financial Statements
Balance Sheet
Represents the financial condition of a company at a certain date.
It details the items the company owns (assets) and the amount the company owes (liabilities).
It also shows the net worth of the company and its liquidity.
Assets = Liabilities + Owners’ Equity
An asset is something of value the business owns.
Current and fixed assets
Liabilities are the claims creditors have against the company.
Short- and long-term debt
Owners’ equity is the residual interest of the firm’s owners in the company.
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2. Table 10.2 Kendon Corporation Balance Sheet for the Year Ended December 31, 2006
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3. Understanding the Key Financial Statements (cont’d)
Income Statement
Commonly referred to as the P&L (profit and loss) statement from activities of the firm.
Provides the results of the firm’s operations.
Income Statement Categories
Revenues: gross sales that the business made for the period
Expenses: Costs associated with producing goods or services
Net Income: The excess (deficit) of revenues over expenses (profit or loss)
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4. Table 10.3 Kendon Corporation Income Statement for the Year Ended December 31, 2006
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5. Understanding the Key Financial Statements (cont’d)
Statement of Cash Flow
An analysis of the cash availability and cash needs of the business that shows the effects of a company’s operating, investing, and financing activities on its cash balance.
How much cash did the firm generate from operations?
How did the firm finance fixed capital expenditures?
How much new debt did the firm add?
Was cash from operations sufficient to finance fixed asset purchases?
The use of a cash budget may be the best approach for an entrepreneur starting up a venture.
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6. Table 10.4 Format of Statement of Cash Flows
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7. Preparing Financial Statements
Budget
One of the most powerful tools the entrepreneur can use in planning financial operations.
Operating Budget
A statement of estimated income and expenses over a specified period of time.
Cash Budget
A statement of estimated cash receipts and expenditures over a specified period of time.
Capital Budget
The plan for expenditures on assets with returns expected to last beyond one year.
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8. The Operating Budget Forecasting
Creating an operating budget through preparation of the sales forecast.
Linear regression: a statistical forecasting technique.
Y = a + bx
Y is a dependent variable—its value is dependent on the values of a, b, and x.
x is an independent variable that is not dependent on any of the other variables
a is a constant.
b is the slope of the line of correlation (the change in Y divided by the change in x).
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9. Figure 10.1 Regression Analysis
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10. Table 10.5 Wheatman’s Market: Sales Forecast for 20XX ($000)
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11. Table 10.7 General Widgets: Production Budget Worksheet for 20XX ($000)
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12. Pro Forma Statements Pro Forma Statements
Projections of a firm’s financial position over a future period (pro forma income statement) or on a future date (pro forma balance sheet).
Using beginning balance sheet balances, the projected changes depicted on the operating and cash-flow budgets are added to create the projected balance sheet totals.
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13. Table 10.10 Wheatman’s Market: Pro Forma Statements
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14. Table 10.10 Wheatman’s Market: Pro Forma Statements (cont’d)
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