Lesson 15: Financial Statements

Objectives Define the components of an income statement Define the components of an income statement Identify the line items that make up a balance sheet Identify the line items that make up a balance sheet Explain how financial statements can be used to evaluate past business and predict future performance Explain how financial statements can be used to evaluate past business and predict future performance Calculate equity based on assets and liabilities Calculate equity based on assets and liabilities Compute revenue, net sales, gross margin, and net profit Compute revenue, net sales, gross margin, and net profit Identify different businesses based on financial statements Identify different businesses based on financial statements

1.Financial Statements Reports that give a detailed picture of a business’s financial status for a given period of time Reports that give a detailed picture of a business’s financial status for a given period of time Detail changes in a business’s financial status Detail changes in a business’s financial status Can tell an owner whether the business is on a successful or troublesome path Can tell an owner whether the business is on a successful or troublesome path

2.Types of Financial Statements Two most popular types: Income Statement Balance Sheet

3.The Income Statement Report that outlines projected or actual revenue and projected or actual business expenses for a given period of time Report that outlines projected or actual revenue and projected or actual business expenses for a given period of time Profit = Revenue (money brought in) minus Expenses (money going out) Profit = Revenue (money brought in) minus Expenses (money going out) AKA P&L (Profit and Loss) AKA P&L (Profit and Loss) When someone references ‘the bottom line’ – it’s the bottom line of this statement: PROFIT When someone references ‘the bottom line’ – it’s the bottom line of this statement: PROFIT

4.Parts of an Income Statement Gross sales Gross sales –For a new business – an estimate of sales for a period –For an established business – amount of money made from selling store merchandise Net sales – amount of money in sales after returns and discounts are subtracted Net sales – amount of money in sales after returns and discounts are subtracted Cost of Goods Sold – the amount of money spent to buy the merchandise that is sold in the store Cost of Goods Sold – the amount of money spent to buy the merchandise that is sold in the store

Gross Margin – Net sales minus COGS, the amount of money used to pay for the expenses in a business Gross Margin – Net sales minus COGS, the amount of money used to pay for the expenses in a business Operating Expenses – all of the expenses associated with running a business Operating Expenses – all of the expenses associated with running a business –Rent, Repairs, Insurance Income – amount of money left after: Gross Margin minus Operating Expenses Income – amount of money left after: Gross Margin minus Operating Expenses Taxes – amount of money owed to federal, state, and local governments Taxes – amount of money owed to federal, state, and local governments –Federal income tax, social security, medicare, unemployment Net Income – Income minus taxes is a positive number Net Income – Income minus taxes is a positive number Net Loss – Income minus taxes is a negative number Net Loss – Income minus taxes is a negative number

5.The Balance Sheet Report that summarizes a business’s assets and liabilities and the owner’s equity Report that summarizes a business’s assets and liabilities and the owner’s equity Assets – tangible items of value owned by a business Assets – tangible items of value owned by a business Liabilities – any debt a business has Liabilities – any debt a business has Owner’s Equity – Assets minus liabilities Owner’s Equity – Assets minus liabilities

6.Analysis of Past Performance Helps determine patterns or trends Helps determine patterns or trends Can reveal areas of potential concern the become major problems Can reveal areas of potential concern the become major problems Can help plan a successful future Can help plan a successful future IE: If you notice you have higher sales during summer months, you will know to increase inventory and staffing during those months IE: If you notice you have higher sales during summer months, you will know to increase inventory and staffing during those months

7.Business Plans and Financial Statements Business plan – map or blueprint for starting a new business Business plan – map or blueprint for starting a new business –Financial plans are a LARGE section of the business plan  Includes: projected income and expenses, cash flow, balance sheet

Sample Financial Statements Sample Financial Statements Go to Starbucks.com Go to Starbucks.com At the bottom of the website, click on Investor Relations At the bottom of the website, click on Investor Relations On the right side of the site, click on Annual Reports On the right side of the site, click on Annual Reports Click on 2009 report Click on 2009 report Pages 1 and 40 Pages 1 and 40

8. Key Math Concepts Revenue = Unit Sales X Ave. Price per Unit Net Sales = Total Sales – Returns and Discounts Gross Margin = Net Sales – COGS Net Profit = Total Revenue – Total Expenses Equity on a Balance Sheet = Assets - Liabilities