Presentation on theme: "USING FINANCIAL STATEMENTS TO GUIDE A BUSINESS"— Presentation transcript:
1 USING FINANCIAL STATEMENTS TO GUIDE A BUSINESS UNIT 3 • SHOW ME THE MONEY: FINDING, SECURING, AND MANAGING ITUSING FINANCIAL STATEMENTS TO GUIDE A BUSINESSClass NameInstructor NameDate, Semester
2 Performance Objectives After this lecture, you should be able to complete the following Performance Objectives1. Understand an income statement. 2. Examine a balance sheet to determine a business’s financing strategy. 3. Use the balance sheet equation for analysis. 4. Perform a financial ratio analysis of an income statement. 5. Calculate return on investment. 6. Perform same-size (common-sized) analysis of an income statement. 7. Use quick, current, and debt ratios to analyze a balance sheet.
3 Scorecard for the Entrepreneur: What Do Financial Statements Show? 8Income StatementBalance SheetCash Flow Statement
4 Income Statements: Showing Profit and Loss over Time 8Part of an Income Statement:RevenueCost of Goods Sold (COGS)Gross ProfitOther Variable CostsContribution Margin (Gross Profit)Fixed Operating Costs (USAIIRD)Earnings before interest and taxes (EBIT)Pre-Tax ProfitTaxesNet Profit/(Loss)
5 8 A Basic Income Statement: Exhibit Basic Income StatementA Basic Company Inc. Income Statement for the Month Ended:A Basic Income Statement:The power of the income statement is that it will tell you whether you are fulfilling the formula of buying low, selling high, and meeting customer needs.The Double Bottom Line:Ideally, you want to have a positive double bottom line; you are making a profit so you can stay in business and achieve your mission
6 8 A Simple Income Statement Exhibit Flea Market Seller Income Statement
7 Income Statement for a More Complex Business 8Exhibit Income Statement for Lola’s Custom Draperies, Inc.,for the Month of March 2011
8 Net Profit/Investment X 100 = ROI% 8Return on Investment (ROI)Entrepreneurs “invest” time, energy or money into something because they expect a “return” of money or satisfaction.Return on investment (ROI) measures return as a percentage of the original investment.Net Profit/Investment X 100 = ROI%What is made over what is paid, times 100.
9 The Balance Sheet: A Snapshot of Assets, Liabilities, and Equity at a Point in Time 8Net Worth (owner’s equity) – the difference between assets and liabilities.Assets: items a company own that have monetary value.Liabilities: debts a company has that must be paid, including unpaid bills.Owner’s Equity (OE): also called net worth. It shows the amount of capital in the business. It consists of common equity, preferred equity, paid-in-capitalFiscal Year – the 12 month financial reporting period for a company
10 8 Short-and Long-Term Assets Current Assets – cash or items that can be quickly converted to cash or will be used within one year.Long-term Assets – those that will take more than one year to use.
11 8 Current and Long-Term Liabilities Liabilities – are all debts owed by the business, such as bank loans, mortgages, lines of credit, and loans to family or friends.Current Liabilities- debts that are scheduled for payment within that year.Long-Term Liabilities – debts that are due in over one year.
12 The Balance Sheet Equation 8The Balance Sheet EquationBalance Sheet Equation – is the equation for calculating owner’s equity.If assets are greater that liabilities, net worth is positive.If liabilities are greater than assets, net worth is negativeAssets – liabilities = Net Worth (or Owner’s Equity or Capital orAssets = liabilities + Owner’s Equity orLiabilities = Assets - Owner’s Equity
13 8The Balance Sheet Shows Assets and Liabilities Obtained through FinancingIf an item was financed with debt, the loan is a liability.If an item was purchased with the owner’s own money (including that of shareholders), it was financed with equity.
14 Total Assets = Total Liabilities + Owner’s Equity (OE) 8Balance SheetTotal Assets = Total Liabilities + Owner’s Equity (OE)
15 The Balance Sheet Shows How a Business Is Financed 8An entrepreneur that relies too much on equity financing from outside investors (who have thus become owners) can lose control of the company.An entrepreneur who takes on too much debt and is unable to make loan payments can lose the business, and possibly personal assets as well, to banks or other creditors.
16 8 Analyzing a Balance Sheet Comparing balance sheets from two points in time is an excellent way to see whether or not a business has been financially successful.AssetsCashInventoryCapital equipmentOther assetsTotal assetsLiabilitiesShort-term liabilitiesLong-term liabilitiesOwner’s equityDepreciation – a certain portion of an asset that is subtracted each year until the asset’s value reaches zero.
17 8 Exhibit 8-8 Balance Sheet Variance Analysis Restaurant Balance Sheet As of Dec. 31, As of Dec. 31, 2010
18 Financial Ration Analysis: What Is It and What Does It Mean to You? 8Financial Ration Analysis: What Is It and What Does It Mean to You?Income Statement Ratios: divide sales into each line item and multiply by a hundred.Return on InvestmentInvestment – something that a person or entity devotes resources to in hopes of future profits or satisfaction.Return on Investments (ROI) - the net profit of a business divided by its start-up investment (percentage)Wealth – the value of assets owned minus the value of liabilities owed.Net profit.Total investment in the business.The period of time for which you are calculating ROI.Net ProfitROI = Investment x = ROI
19 8Return on SalesReturn on sales (ROS) – net income divided by sales for a particular time period (percentage).Profit margin (return on sales) – net income divided by sales (percentage).Common-Sized Statement AnalysisOperating ratio: an expression of a value versus salesBalance-Sheet AnalysisNet IncomeReturn on Sales (ROS) = Sales
20 8 Current & Quick Rations Liquidity – the ability to convert assets into cash.Current Ratio-liquidity ration consisting of the total sum of cash plus marketable securities divided by current liabilities.Marketable Securities- investments that can be converted into cash within 24 hours.Quick Ration-the calculation of cash in relation to covering current debt.Cash + Marketable SecuritiesQuick Ratio = Current LiabilitiesCurrent Liabilities – ( Inventory + Prepayments)Quick Ratio = Current Liabilities
21 Debt Ratios: Showing the Relationship Between Debt & Equity 8Debt Ratios: Showing the Relationship Between Debt & EquityDebt-to-Equity Ratio – the comparison of total debt to total equity.Debt Ratio – the comparison of total debt to total assets.DebtDebt-to-Equity Ratio = EquityTotal DebtDebt Ratio = Total Assets
22 8 Operating-Efficiency Ratios Collection-period ratio Receivable turnover ratioInventory turnover ratioAverage Accounts Receivable (Balance Sheet) = # of daysAverage Daily Sales (Income Statement)Total Sales (Income Statement) = # of timesAverage Accounts Receivable (Balance Sheet)Cost of Goods Sold (Income Statement) = # of timesAverage Inventory (Balance Sheet)
23 Key Terms current assets current liabilities current ratio debt ratio debt-to-equity ratiofiscal yearinvestmentliquidity
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