Presentation on theme: "Chapter 8 Using Financial Statements to Guide a Business"— Presentation transcript:
1 Chapter 8 Using Financial Statements to Guide a Business EntrepreneurshipChapter 8Using Financial Statements to Guide a Business
2 Entrepreneurs Use Financial Statements Income statementCash flow statementBalance sheetData for the financial statements comes from the accounting journal.The statements show the health of the business at a glance.
3 Income Statement: Scorecard for the Entrepreneur Prepared monthly and at end of fiscal yearAlso called “profit and loss statement”Shows whether or not business is making a profitProfit is entrepreneur’s reward for adding value to scarce resources
4 Eight Parts of the Income Statement RevenueCost of Goods Sold (COGS)Other Variable CostsContribution Margin (Gross Profit)Fixed Operating Costs (USAIIRD)Pre-Tax ProfitTaxesNet Profit/(Loss)
8 Return 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 To Calculate ROI for a Business, You Need 3 Things: Net Profit: found on bottom line of the income statement.Investment: all money used to start the business (Start-Up Investment) plus additional money invested later.The period of time for which you are calculating ROI (typically one month or one year).
10 Income Statement Ratios Express each line of the income statement as a percentage by dividing sales into it and multiplying by 100.This makes it easy to see how each item is affecting the business’s profit.Return on Sales (ROS) =Net Income/SalesOperating Ratio =Fixed Operating Costs/Sales
11 Same Size Analysis: Used to Compare Income Statements
12 The Balance Sheet A “point-in-time” statement Shows how a business is financedPrepared at end of fiscal year 3 itemsAssets = things a company owns that are worth moneyLiabilities = debts a company must pay, including unpaid billsOwner’s Equity (OE) = Assets-Liabilities, also called “net worth”
14 Short and Long-Term Assets Assets are all items worth money owned by the business:Current assets—cash or items that can be quickly turned into cashAccounts receivablesInventorySuppliesLong-term assets—items that would take the business more than one year to useEquipmentFurnitureMachineryReal estate
15 Current and Long-Term Liabilities Liabilities are all debts owed by the business.Current liabilities—debts that must be paid within one yearBillsLines of creditShort-term loansLong-term liabilities—debts that will be paid over more than one yearBank loansMortgages
16 The Balance Sheet Equation Assets – Liabilities = Owner’s EquityorAssets = Owner’s Equity – LiabilitiesOwner’s Equity is also called:Net worthCapital
17 Assets Must Equal (“Balance”) Liabilities + O.E. If an item was financed with debt, the loan is a liability.If an item was purchased with the owner’s money, it was financed with equity.Liabilities and owner’s equity pay for all items owned by the business (assets).
18 Analyzing a Balance Sheet The balance sheet shows how a business is financed.Investors use ratios and “same-size” analysis to analyze a balance sheet.
20 Quick and Current Ratios Quick Ratio: Cash + marketable securitiesCurrent LiabilitiesShould always be greater than 1Shows whether there is enough cash to cover all bills within 24 hoursCurrent Ratio: Current AssetsShows whether a business could sell some assets to pay off its debts
21 Debt RatiosDebt ratios show at a glance how much of the company is financed with debt and how much with equity.Debt-to-Equity Ratio: Debt/EquityExample: ratio of 1 means for every $1 of debt the company owns $1 of assets.Debt Ratio: Debt/AssetsExample: ratio of 0.5 means company is in debt for 50% of its assets.Entrepreneurs like to have a fairly high debt ratio, because it means they are financing the business not with their own money but with credit from creditors and suppliers.
22 Operating Efficiency Ratios Collection Period Ratio:Average accounts receivable (Balance Sheet)Average daily sales (Income Statement)Receivable Turnover Ratio:Total Sales (Income Statement)Average Accounts Receivables (Balance Sheet)Inventory Turnover Ratio:Cost of Goods Sold (Income Statement)Average Inventory (Balance Sheet)= # of days= # of times= # of times