FINANCIAL
STATEMENTS
Business Management
Today’s Objectives


Interpret basic financial statements,
including cash flow, income statement, and
a balance sheet.
Prepare a budget to include short-term and
long-term expenditures.
Financial Statements
1.
Income Statement
2.
Cash Flow Statement
3.
Balance Sheet
The Income Statement
Prepared at the
end of each
month
 Tracks income
and expenses
 Also called a
profit and loss
statement

Preparing the
Income Statement




Sales – how much money the company
will be receiving for selling a product
Total Cost of Goods Sold – the cost of
making one unit multiplied by the number
of units sold
Gross Profit = sales – cost of goods sold
Operating Costs – items that must be paid
to operate a business including fixed costs
and variable costs (USAIIR)
Preparing the
Income Statement



Profit Before Taxes – profit before taxes
but after ALL other costs have been paid
Taxes – 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 paid
Example of an
Income Statement
Income Statement
Sales
The Math
$100 (25 ties × $4 per tie = $100)
less Total Cost of Goods Sold
$50 (25 ties × $2 per tie = $50)
Gross Profit
$50 ($100 - $50 = $50)
less Operating Costs
Fixed Costs $24
Variable Costs $0
Profit Before Taxes
Taxes
Net Profit
$24 ($24 for flyers)
$26 ($50 - $24 = $26)
$6
$20 ($26 - $6 = $20)
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.
Determining the
Break-Even Point

Define your unit of sale.

Figure your gross profit per unit.
[ Selling Price per Unit – Cost of Goods Soled per Unit = Gross Profit per Unit ]

Calculate break-even units.
calculated assuming all operating
costs are fixed.
 Typically
[ Monthly Fixed Costs ÷ Gross Profit per Unit = Break-Even Units ]
Depreciation


If you buy expensive,
long-lasting assets, you
will want to include
depreciation in your
income statement.
Depreciation is when a
certain portion of the
cost of an asset is
subtracted each year
until the asset’s value
reaches zero.
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.
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.
Income Statement for Lola’s Custom Draperies, Inc.
March 1999
Sales
Cost of Goods Sold
Materials
Labor
$85,456
100%
11,550
17,810
less Total Cost of Goods Sold
$29,360 ($11,550 + $17,810)
34%
Gross Profit
$56,096 ($85,456 - $29,360)
65.6%
Operating Costs
Fixed Costs
Factory Rent & Utilities
Salaries & Admin
Depreciation
Variable Costs
Sales Commissions
$ 8,000
12,000
2,000
less Total Operating Costs
$30,000 ($8,000 + 12,000 + 2,000 + 8,000)
35%
Profit Before Taxes
$26,096 ($56,096 - $28,000)
30%
6,524 ($26,096 x 0.25)
7.6%
$19,572 ($26,096 - $6,524
22.9%
Taxes (25%)
Net Profit / Loss
8,000
Example
Income Statement for a Fast-Food Restaurant
Sales
$2,600,000
100%
Cost of Goods Sold
Food
Paper Products
$792,000
108,000
less Total Cost of Goods Sold
$900,000
35%
Gross Profit
$1,700,000
65%
less Total Operating Costs
$1,000,000
38%
Profit
$700,000
27%
Taxes (33%)
$233,000
9%
Net Profit
$467,000
18%
The Cash Flow
Statement

Records inflows and
outflows of cash when
1.
they actually occur

Takes out sales on
credit and depreciation
so that business owners
can see how much
money actually flowed
in/out in a month
2.
3.
All 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 taxes
The Balance Sheet



Prepared at the
end of the
business’s fiscal
year
Usually October 1
to September 30
Based on the
Financial Equation
1.
2.
3.
Assets – all items of
worth owned by the
business
Liabilities – all debts
owed by the business
Owner’s Equity – also
called capital or net
worth; amount left
over after liabilities
are subtracted from
assets
The Financial Equation
Assets – Liabilities = Owner’s Equity
Example of a Balance
Sheet
Hometown Restaurant – Balance Sheet, January 1999
Assets
Cash
Liabilities
$10,000
Loan (for stove)
$5,000
Tables & Chairs
3,000
Owner’s Equity
11,900
Stove
5,000
($10,000 cash + 3,000 tables & chairs - $1,100 depreciation)
Subtotal
$18,000
less
Depreciation
Total Assets
1,100
$16,900 Total Liabilities
$16,900
Summary

Income Statement
 Break-Even
 Financial
Analysis
Ratios

Cash Flow Statement

Balance Sheet