11 FINANCIAL STATEMENTS Section 11.1 Income Statements & Cash Flow Section 11.2 The Balance Sheet

Income Statements & Cash Flow 11.1 Income Statements & Cash Flow Explain the importance of an income statement Identify the parts of an income statement Prepare an income statement Understand how cash flow affects entrepreneurs Demonstrate a burn-rate calculation Section 11.1: Income Statements & Cash Flow

Income Statements An income statement is a financial document that summarizes a business’s income and expenses over a given time period and shows whether the business made a profit or took a loss. Income statements are prepared periodically to show how a business is performing: Monthly Quarterly Annually Income statements differ in how they show their variable expenses. They may appear under: Cost of Goods Sold Cost of Goods Manufactured and Sold Cost of Services Sold Section 11.1: Income Statements & Cash Flow

Parts of a Typical Income Statement Income statements generally include these parts: Revenue. The money the business receives from selling products or services. Cost of Goods Sold. The cost of producing the goods or services. Gross Profit. Net sales minus the cost of goods sold. Operating Expenses. The expenses of running the business. Pre-Tax Profit. Gross profit minus the operating expenses. Net Profit (Loss). Pre-tax profit minus taxes. Section 11.1: Income Statements & Cash Flow

Traditional-Format Income Statement The traditional-format income statement subtracts the Cost of Goods Sold from the Net Sales to determine the Gross Profit. COGS subtracted from Net Sales Section 11.1: Income Statements & Cash Flow

Contribution-Margin-Format Income Statement The contribution-margin-format income statement subtracts all the variable expenses from the Net Sales to determine the Contribution Margin. Total Variable Expenses subtracted from Net Sales Section 11.1: Income Statements & Cash Flow

Preparing Income Statements To prepare an income statement: Determine the business's Revenue. Calculate the Cost of Goods Sold. Determine the Gross Profit. Calculate Operating Expenses. Determine the Pre-Tax Profit. Determine the Net Profit or Loss. Section 11.2: The Balance Sheet

Cash Inflow – Cash Outflow = Net Cash Cash Flow Cash flow is the money received minus what is spent over a specified period of time. The cash flow equation is: A cash flow statement is a financial document that records inflows and outflows of cash when they actually occur. Cash Inflow – Cash Outflow = Net Cash Section 11.1: Income Statements & Cash Flow

Ways to Keep Cash Flowing Five ways to avoid being caught without enough cash to pay your bills are: Collect Cash as Soon as Possible Pay Bills Close to the Due Date Keep Track of Your Cash Lease Equipment Keep Inventory to a Minimum Cash flow is cyclical for many businesses, meaning that it varies according to the time of year. Section 11.1: Income Statements & Cash Flow

Cash on Hand ÷ Burn Rate = Number of Months before The Burn Rate The rate at which a company spends cash to cover overhead costs without generating a positive cash flow is called the burn rate. Use the burn rate to calculate how long a company can go without revenue. Cash on Hand ÷ Burn Rate = Number of Months before Cash Runs Out Section 11.1: Income Statements & Cash Flow

Section 11.2: The Balance Sheet Identify the purpose and components of a balance sheet Explain how balance sheets are prepared Provide two methods used to analyze balance sheets Section 11.2: The Balance Sheet

Assets – Liabilities = Owner’s Equity What Is a Balance Sheet? A balance sheet is a financial statement that summarizes the assets and liabilities (debts) of a business. The balance sheet focuses on the fundamental accounting equation: Assets include everything owned by the business that has a monetary value. Liabilities include any outstanding bill or loan that must be repaid. The value of the business on a specific date is referred to as the owner’s equity. Assets – Liabilities = Owner’s Equity Section 11.2: The Balance Sheet

What Is a Balance Sheet? Assets are the items of value owned by a business. Short-term assets that can be converted into cash within one year are current assets. Assets that usually take longer than one year to turn into cash are long-term assets. Liabilities are all sums of money owed by the business. Short-term debts that must be repaid within one year are current liabilities. Debts that usually take longer than one year to repay are long-term liabilities. Section 11.2: The Balance Sheet

Preparing Balance Sheets Balance sheets are divided into two sections: (1) Assets and (2) Liabilities and Owner’s Equity. To prepare a balance sheet: Determine the value of the company’s assets. Establish the value of the business’s long-term assets. Verify the company’s total liabilities. Determine the value of the business’s long-term assets. Calculate the business's long-term liabilities. Determine the owner’s equity. Section 11.2: The Balance Sheet

Analyzing Balance Sheets A business usually prepares one balance sheet at the beginning of its fiscal year and another at the end of it and compares them to determine whether the business is succeeding or not. Using the Comparative Balance Sheet method, a business can see what has changed after one year by checking the differences between the beginning and ending balances. With Same-Size Balance Sheet Analysis, a percentage column is added so that the business can quickly see the percentage change in all balance sheet items from one year to the next. Section 11.2: The Balance Sheet