2 Today’s ObjectivesInterpret basic financial statements, including cash flow, income statement, and a balance sheet.Prepare a budget to include short- term and long-term expenditures.
3 Essential QuestionsWhat is the purpose of each financial statement: income statement, cash flow, and balance sheet?Which figures are included on each financial statement?Explain the significance of the break- even point as it relates to finances.What is the financial equation and how does it relate to the balance sheet?
4 Financial Statements Income Statement Cash Flow Statement Balance Sheet
5 The Income Statement Prepared at the end of each month Tracks income and expensesAlso called a profit and loss statementPurpose of an Income Statement
6 Preparing the Income Statement Sales – how much money the company will be receiving for selling a productTotal Cost of Goods Sold – the cost of making one unit multiplied by the number of units soldGross Profit = sales – cost of goods soldOperating Costs – items that must be paid to operate a business including fixed costs and variable costs (USAIIR)Figures Included on an Income Statement
7 Preparing the Income Statement Profit Before Taxes – profit before taxes but after ALL other costs have been paidTaxes – payments required by federal, state, and local governments based on a business’s profit (sales tax, income tax)Net Profit or Net Loss – a business’s profit or loss after taxes are paidFigures Included on an Income Statement
8 Example of an Income Statement The MathSales$100(25 ties × $4 per tie = $100)less Total Cost of Goods Sold$50(25 ties × $2 per tie = $50)Gross Profit($100 - $50 = $50)less Operating CostsFixed Costs$24($24 for flyers)Variable Costs$0Profit Before Taxes$26($50 - $24 = $26)Taxes$6Net Profit$20($26 - $6 = $20)
9 DepreciationIf you buy expensive, long-lasting assets, you will want to include depreciation in your income statement (fixed cost).Depreciation is when a certain portion of the cost of an asset is subtracted each year until the asset’s value reaches zero.Reflect wear & tear
10 Calculating Depreciation Hometown Restaurant buys $3,000 worth of tables and chairs that will last approximately 5 years before needing to be replaced.The income statement shows that $600 is subtracted each year to “save” for the new tables & chairs to be purchased in the future.
11 Financial Ratio Analysis Entrepreneurs don’t just look at their income statements… they analyze them by dividing sales into each line item.Each item can then be expressed as a percentage of sales.Relating each piece of the income statement to sales will help you notice changes in costs from month to month.Figures Included on an Income Statement
12 Income Statement for Lola’s Custom Draperies, Inc. March 1999Sales$85,456100%Cost of Goods SoldMaterialsLabor11,55017,810less Total Cost of Goods Sold$29,360($11,550 + $17,810)34%Gross Profit$56,096($85,456 - $29,360)65.6%Operating CostsFixed CostsFactory Rent & UtilitiesSalaries & AdminDepreciationVariable CostsSales Commissions$ 8,00012,0002,0008,000less Total Operating Costs$30,000($8, , , ,000)35%Profit Before Taxes$26,096($56,096 - $28,000)30%Taxes (25%)6,524($26,096 x 0.25)7.6%Net Profit / Loss$19,572($26,096 - $6,524)22.9%
13 Income Statement for a Fast-Food Restaurant ExampleIncome Statement for a Fast-Food RestaurantSales$2,600,000100%Cost of Goods SoldFoodPaper Products$792,000108,000less Total Cost of Goods Sold$900,00035%Gross Profit$1,700,00065%less Total Operating Costs$1,000,00038%Profit$700,00027%Taxes (33%)$233,0009%Net Profit$467,00018%
14 Summarizing the Income Statement Purpose track monthly income & expensesIncludes total of seven (7) figures plus ratiosAlso accounts for depreciation, which is an estimated or projected figure
15 The Break-Even Analysis When sales and costs are equal, the total at the bottom of the income statement is zero.This condition is called the break- even point.Many new businesses lose money in the beginning, but a business must at least break even to survive.Businesses must know how many units to sell during a month to cover costs and break even.Significance of Break-Even point
16 Determining the Break-Even Point Define your unit of sale.Figure your gross profit per unit.[ Selling Price per Unit – Cost of Goods Sold per Unit = Gross Profit per Unit ]Calculate break-even units.Typically calculated assuming all operating costs are fixed.[ Monthly Fixed Costs ÷ Gross Profit per Unit = Break-Even Units ]Significance of Break Even Point
17 The Cash Flow Statement Records inflows and outflows of cash when they actually occurTakes out sales on credit and depreciation so that business owners can see how much money actually flowed in/out in a monthAll sources of cash that come into the business with actual dates they are received (receipts)Cash outflows that must be made within the month (disbursements)Net change in cash flow before and after taxesPurpose of & Figures Included on a Cash Flow Statement
18 The Balance Sheet Prepared at the end of the business’s fiscal year Usually October 1 to September 30Based on the Financial EquationAssets – all items of worth owned by the businessLiabilities – all debts owed by the businessOwner’s Equity – also called capital or net worth; amount left over after liabilities are subtracted from assetsPurpose of & Figures Included on a Balance Sheet
19 The Financial Equation Assets – Liabilities = Owner’s Equity
20 Example of a Balance Sheet Hometown Restaurant – Balance Sheet, January 1999AssetsLiabilitiesCash$10,000Loan (for stove)$5,000Tables & Chairs3,000Owner’s Equity11,900Stove5,000($10,000 cash + 3,000 tables & chairs - $1,100 depreciation)Subtotal$18,000less Depreciation1,100Total Assets$16,900Total Liabilities
21 Closing TaskDescribe an income statement – what is its purpose and what is included?Describe a cash flow statement – what is its purpose and what is included?Describe the balance sheet – what is its purpose and what is included?Write the financial equation. How does it relate to the balance sheet?Why should business owners complete a Break-Even Analysis?