1. Financial Statements
Business Management

2. Today’s Objectives
Interpret basic financial statements, including cash flow, income statement, and a balance sheet.
Prepare a budget to include short- term and long-term expenditures.

3. Essential Questions
What is the purpose of each financial statement: income statement, cash flow, and balance sheet?
Which figures are included on each financial statement?
Explain the significance of the break- even point as it relates to finances.
What is the financial equation and how does it relate to the balance sheet?

4. Financial Statements Income Statement Cash Flow Statement
Balance Sheet

5. The Income Statement Prepared at the end of each month
Tracks income and expenses
Also called a profit and loss statement
Purpose of an Income Statement

6. Preparing the Income Statement
Sales – how much money the company will be receiving for selling a product
Total Cost of Goods Sold – the cost of making one unit multiplied by the number of units sold
Gross Profit = sales – cost of goods sold
Operating Costs – items that must be paid to operate a business including fixed costs and variable costs (USAIIR)
Figures Included on an Income Statement

7. Preparing the Income Statement
Profit Before Taxes – profit before taxes but after ALL other costs have been paid
Taxes – payments required by federal, state, and local governments based on a business’s profit (sales tax, income tax)
Net Profit or Net Loss – a business’s profit or loss after taxes are paid
Figures Included on an Income Statement

8. Example of an Income Statement
The Math
Sales
$100
(25 ties × $4 per tie = $100)
less Total Cost of Goods Sold
$50
(25 ties × $2 per tie = $50)
Gross Profit
($100 - $50 = $50)
less Operating Costs
Fixed Costs
$24
($24 for flyers)
Variable Costs $0
Profit Before Taxes
$26
($50 - $24 = $26)
Taxes $6
Net Profit
$20
($26 - $6 = $20)

9. Depreciation
If you buy expensive, long-lasting assets, you will want to include depreciation in your income statement (fixed cost).
Depreciation is when a certain portion of the cost of an asset is subtracted each year until the asset’s value reaches zero.
Reflect wear & tear

10. Calculating Depreciation
Hometown Restaurant buys $3,000 worth of tables and chairs that will last approximately 5 years before needing to be replaced.
The income statement shows that $600 is subtracted each year to “save” for the new tables & chairs to be purchased in the future.

11. Financial Ratio Analysis
Entrepreneurs don’t just look at their income statements… they analyze them by dividing sales into each line item.
Each item can then be expressed as a percentage of sales.
Relating each piece of the income statement to sales will help you notice changes in costs from month to month.
Figures Included on an Income Statement

12. Income Statement for Lola’s Custom Draperies, Inc.
March 1999
Sales
$85,456
100%
Cost of Goods Sold
Materials
Labor
11,550
17,810
less Total Cost of Goods Sold
$29,360
($11,550 + $17,810)
34%
Gross Profit
$56,096
($85,456 - $29,360)
65.6%
Operating Costs
Fixed Costs
Factory Rent & Utilities
Salaries & Admin
Depreciation
Variable Costs
Sales Commissions
$ 8,000
12,000
2,000
8,000
less Total Operating Costs
$30,000
($8, , , ,000)
35%
Profit Before Taxes
$26,096
($56,096 - $28,000)
30%
Taxes (25%)
6,524
($26,096 x 0.25)
7.6%
Net Profit / Loss
$19,572
($26,096 - $6,524)
22.9%

13. Income Statement for a Fast-Food Restaurant
Example
Income Statement for a Fast-Food Restaurant
Sales
$2,600,000
100%
Cost of Goods Sold
Food
Paper Products
$792,000
108,000
less Total Cost of Goods Sold
$900,000
35%
Gross Profit
$1,700,000
65%
less Total Operating Costs
$1,000,000
38%
Profit
$700,000
27%
Taxes (33%)
$233,000 9%
Net Profit
$467,000
18%

14. Summarizing the Income Statement
Purpose track monthly income & expenses
Includes total of seven (7) figures plus ratios
Also accounts for depreciation, which is an estimated or projected figure

15. The Break-Even Analysis
When sales and costs are equal, the total at the bottom of the income statement is zero.
This condition is called the break- even point.
Many new businesses lose money in the beginning, but a business must at least break even to survive.
Businesses must know how many units to sell during a month to cover costs and break even.
Significance of Break-Even point

16. Determining the Break-Even Point
Define your unit of sale.
Figure your gross profit per unit.
[ Selling Price per Unit – Cost of Goods Sold per Unit = Gross Profit per Unit ]
Calculate break-even units.
Typically calculated assuming all operating costs are fixed.
[ Monthly Fixed Costs ÷ Gross Profit per Unit = Break-Even Units ]
Significance of Break Even Point

17. The Cash Flow Statement
Records inflows and outflows of cash when they actually occur
Takes out sales on credit and depreciation so that business owners can see how much money actually flowed in/out in a month
All sources of cash that come into the business with actual dates they are received (receipts)
Cash outflows that must be made within the month (disbursements)
Net change in cash flow before and after taxes
Purpose of & Figures Included on a Cash Flow Statement

18. The Balance Sheet Prepared at the end of the business’s fiscal year
Usually October 1 to September 30
Based on the Financial Equation
Assets – all items of worth owned by the business
Liabilities – all debts owed by the business
Owner’s Equity – also called capital or net worth; amount left over after liabilities are subtracted from assets
Purpose of & Figures Included on a Balance Sheet

19. The Financial Equation
Assets – Liabilities = Owner’s Equity

20. Example of a Balance Sheet
Hometown Restaurant – Balance Sheet, January 1999
Assets
Liabilities
Cash
$10,000
Loan (for stove)
$5,000
Tables & Chairs
3,000
Owner’s Equity
11,900
Stove
5,000
($10,000 cash + 3,000 tables & chairs - $1,100 depreciation)
Subtotal
$18,000
less Depreciation
1,100
Total Assets
$16,900
Total Liabilities

21. Closing Task
Describe an income statement – what is its purpose and what is included?
Describe a cash flow statement – what is its purpose and what is included?
Describe the balance sheet – what is its purpose and what is included?
Write the financial equation. How does it relate to the balance sheet?
Why should business owners complete a Break-Even Analysis?

22. Understanding a Balance Sheet Activity

23. Understanding a Balance Sheet Activity
Assets
Cash
Accts Rec. – Dean Mills
Supplies
Insurance
Liabilities
Accts Pay. – Topline
Owner’s Equity
Owner’s Capital
Expense?
Investment?
Revenue?
Withdrawal?