1. Financial Analysis of a Business
Chapter 16
Financial Analysis of a Business

2. Uses of Financial Reports
The amount of money a business earns is one way to judge its success.
Keep thorough & accurate records
Prepare important financial reports
Interpret the information
Make decisions that will affect future financial results.

3. Financial Statements
Financial Statements – are reports that summarize financial data over a period of time, such as a month, three months, a year, or even the life of the business.
Balance Sheet – reports assets, liabilities, and capital on a specific date.

4. Parts of the Balance Sheet
Assets – are anything of value owned.
Liabilities – are claims against the assets (what you owe, debts)
Capital – what the owner or organization is worth after subtracting the liabilities from the assets.

5. Types of Assets Cash Land Buildings
Inventory (the value of goods on hand)
Accounts Receivables (money that is owed to you from customers)

6. Types of Liabilities
Accounts Payable – the money that you owe to your creditors.
Balance Sheets are prepared yearly for the purpose of comparing this years financial progress with years past.

7. Balance Sheet Assets: Liabilities Capital Cash $9,000
ABC Company
Balance Sheet
December 31, 2002
Assets:
Cash $9,000
Accounts Receivables 8,000
Inventory 37,000
Equipment 25,000
Liabilities
Accounts Payable $31,000
Total Liabilities $31,000
Capital
Owner #1 $24,000
Owner #2 $24,000
Total Assets $79,000
Total Liabilities & Capital $79,000

8. Accounting Equation Assets = Liabilities + Capital OR

9. Income Statements
Income Statement is a financial statement that reports total Revenue and expenses for a specific period, such as a month or a year.
Revenue – income earned for the period from the sale of goods and services.
Expenses – all costs incurred in operating the business.
Profit or Loss - the difference between the total revenue and the total expenses.
The Income Statement shows a picture of success or failure for a specific period of a year or less.

10. Parts of the Income Statement
Revenue
Cost of Goods Sold – the amount the retailer paid the supplier for the merchandise.
Gross Profit – the amount remaining after subtracting the cost of goods sold from the revenue
Operating Expenses – are all of the expenses (other than CGS), that are spent in order to conduct business.
Net Profit/Loss – the amount remaining after subtracting all of the expenses from the Gross Profit.

11. Analysis of Financial Data
Cash Flow – is the movement of cash into and out of a business.
Businesses must have cash to pay their bills when they are due and must plan ahead when making large purchases for furniture or equipment.