1. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-1 Financial Statement Basics

2. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-2  Understand how financial statements are used by businesses.  Understand the differences and similarities that exist between a personal cash flow statement and a business income statement.  Distinguish between fixed and variable expenses.  Understand the changes in income statements that exist with different forms of business. Learning Objectives

3. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-3  Understand the differences and similarities that exist between a personal statement of financial position and a business balance sheet.  Analyze the components of the basic accounting equation.  Distinguish between assets and liabilities.  Understand the relationship between fixed assets and depreciation. Learning Objectives (continued)

4. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-4  Understand the significance of the statement of cash flows.  Given the basic data for a company, be able to construct a financial statement.  Understand the problems that may exist with financial statements. Learning Objectives (continued)

5. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-5 Financial Statement (Personal Form) for a Bank Loan  Single bank loan application form which incorporates two individual financial forms: 1. Statement of financial position –Cash –Cash equivalents –Invested assets –Use assets –Liabilities –Net worth 2. Personal cash flow statement –Income –Fixed expenses –Variable expenses

6. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-6

7. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-7 Personal Income Statement (Cash Flow Statement)  Income—Include all sources › Wages, tips, overtime › Interest on savings, stock dividends, etc.  Fixed expenses › Contractual, must be paid › Rent, insurance, utilities, car payments, etc.  Variable expenses › You control level of expenses (food, clothing)

8. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-8

9. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-9 Income Statement Business  Basic Format › Sales, revenues, income from doing business › Less cost of goods sold › Gross profit › Less operating expenses › Operating income › Less interest › Net income (explain)

10. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-10

11. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-11 Balance Sheet for different legal forms (Statement of Financial Position)  Basic Accounting Equation Individual: Total assets = Total liabilities + Net Worth Sole Proprietorship: Total Assets = Total Liabilities + Owner’s Equity Partnership: Total Assets = Total Liabilities + Partners’ Equity Corporation: Total Assets = Total Liabilities + Stockholders’ Equity

12. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-12 Balance Sheet (Statement of Financial Position) (continued)  Total assets › Current assets –Cash, accounts receivable, inventory, treasuries –Anything in your possession that can be reasonably be expected to turn into cash in less than one year › Fixed assets –Land –Building & equipment (less accumulated depreciation) –Net building & equipment

13. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-13 Balance Sheet (Statement of Financial Position) (continued)  Total liabilities › Current liabilities –Accounts payable, notes payable, taxes payable › Long-term liabilities (debt)  Total equity › Preferred stock › Common stock par value › Paid-in capital in excess of par (common) › Retained earnings

14. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-14 Sole proprietorship

15. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-15 Balance sheet – “Partners’ equity” Partnership

16. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-16 Corporation

17. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-17 Statement of Cash Flows  Statement of cash flows shows how the company’s working capital flows into and out of the business during the year.  Statement of cash flows includes: › Cash flows from operating activities is the difference between all of the cash received by the business and all of the cash paid out by the business in conducting its day-to-day operations (usually + flow) › Cash Flows from Investing Activities: –Acquisition or sale of Plant Assets (usually - cash flow) › Cash Flows from Financing Activities: –Proceeds from issuance or sale of stock (preferred & common), bonds (+ flow). Purchase of stock or the payment of long-term debt (- flow).

18. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-18 Statement of Cash Flows (continued) › Examples of operating cash flow –Receipts: All cash received from sales, changes in accounts receivable, changes in inventory. NOTE: An increase in accounts receivable or inventory represents a negative cash flow (see next slide). A reduction in receivables or inventory is a positive cash flow. –Payments: All payments made by the company to all accounts (suppliers, employees, rent, utilities, etc.). An increase in accounts payable is a positive cash flow. › Net increase (decrease) in cash plus the cash balance, previous year equals cash balance, current year.

19. Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458 3-19 Corporation