FINANCIAL STATEMENTS
Business Management


Interpret basic financial statements, including cash flow, income statement, and a balance sheet.

Prepare a budget to include shortterm and long-term expenditures.


What 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 breakeven point as it relates to finances.

What is the financial equation and how does it relate to the balance sheet?

1.
2.
3.
Income Statement
Cash Flow Statement
Balance Sheet


Prepared at the end of each month

Tracks income and expenses

Also called a profit and loss statement
Purpose of an Income 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)
Figures Included on an Income Statement

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
Figures Included on an Income Statement

Example of an Income Statement
Income Statement
Sales
less Total Cost of Goods
Sold
Gross Profit
$100
$50
$50
less Operating Costs
Fixed Costs
Variable Costs
Profit Before Taxes
Taxes
Net Profit
$24
$0
$26
$6
$20
The Math
(25 ties × $4 per tie = $100)
(25 ties × $2 per tie = $50)
($100 - $50 = $50)
($24 for flyers)
($50 - $24 = $26)
($26 - $6 = $20)


If 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.


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.


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

Income Statement for Lola’s Custom Draperies, Inc.
March 1999
$85,456 Sales
Cost of Goods Sold
Materials
Labor
11,550
17,810
less Total Cost of Goods Sold $29,360
Gross Profit $56,096
Operating Costs
Fixed Costs
Factory Rent & Utilities
Salaries & Admin
Depreciation
Variable Costs
Sales Commissions
$ 8,000
12,000
2,000
8,000
($11,550 + $17,810)
($85,456 - $29,360)
less Total Operating Costs
Profit Before Taxes
Taxes (25%)
Net Profit / Loss
100%
34%
65.6%
$30,000 ($8,000 + 12,000 + 2,000 + 8,000) 35%
$26,096
6,524
$19,572
($56,096 - $28,000)
($26,096 x 0.25)
($26,096 - $6,524)
30%
7.6%
22.9%

Income Statement for a Fast-Food Restaurant
Sales $2,600,000 100%
Cost of Goods Sold
Food
Paper Products
less Total Cost of Goods Sold
Gross Profit
$792,000
108,000
$900,000
$1,700,000
35%
65%
less Total Operating Costs
Profit
Taxes (33%)
Net Profit
$1,000,000 38%
$700,000 27%
$233,000 9%
$467,000 18%


Purpose track monthly income & expenses

Includes total of seven (7) figures plus ratios

Also accounts for depreciation, which is an estimated or projected figure


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

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



Records inflows and outflows of cash when 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
1.
2.
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)
3.
Net change in cash flow before and after taxes
Purpose of & Figures Included on a Cash Flow Statement


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
Purpose of & Figures Included on a Balance Sheet

Assets – Liabilities = Owner’s Equity

Assets
Cash
Tables & Chairs
Stove
Hometown Restaurant – Balance Sheet, January 1999
$10,000
Liabilities
Loan (for stove)
3,000 Owner’s Equity
5,000
$5,000
11,900
($10,000 cash + 3,000 tables & chairs - $1,100 depreciation)
Subtotal less Depreciation
Total Assets
$18,000
1,100
$16,900 Total Liabilities $16,900

1)
2)
3)
4)
5)
Describe 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?