Financial Statement Basics BDI3C

Major Financial Statements  Balance Sheet Individual: Net Worth Statement  Income Statement  Cashflow Statement

Balance Sheet Basics  A comparison of what you own and what you owe.  A “financial photograph”  To figure your balance sheet, List all of the things you own (assets), List money owed to others (liabilities). Total your assets and your liabilities, Then subtract total liabilities from total assets. Do you have a positive or a negative net worth?

Balance Sheet Assets Cash$ 1,500 Investments$ 7,500 Car$ 8,000 House$58,000 Total Assets$75,000 Liabilities Owed to friend$ 500 Credit Cards$ 2,500 Mortgage$32,000 Bank Loan$ 7,000 Total Liabilities$42,000 Equity = Total Assets – Total Liabilities = $75,000 - $42,000 = $33,000 = $33,000

Income Statement Basics  Income: money that you receive for selling your services/goods E.g., wages, gifts, allowances, interest, dividends.  Expenses: Money you pay to buy the things you need to make or sell your services/goods E.g., rent, electricity bills, payment on debt

Income Statement (for month ended September 30, 2005) Income Salary$40,000 Total Income$40,000 Expenses Rent$10,000 Electricity$ 1,200 … Total Expenses($32,000) Net Income(Income – Expenses)$ 8,000

Comparison of B/S and I/S  Balance Sheet is what you own and owe NOW, at this one point in time Every day can be different, depending on if you buy or sell assets, pay off or take on more debts  Income Statement tracks changes in income and expenses over a period of time, usually a year. At the end of the year, all income statement accounts revert to zero – you start over again

Relationship between B/S and I/S  Income is used to: Buy more assets Pay off debt Pay expenses  Thus, increases in income above break even point: Add to assets Reduce debt  For a business, your assets should generate more income