Using accounting and
financial information
Lesson 6
The purpose of business is to…
MAKE A PROFIT
BUT
HOW DO YOU KNOW YOU MADE A PROFIT?
THE PROFIT EQUATION
PROFIT = SALES - COSTS
From Course Learning Outcomes:
4. Calculate profit (or loss) and use accounting and financial
information to support management decisions for a small business.
purpose of a business
Make a profit
• How do you know if the business made a profit?
• How do you know how financially healthy the business is?.
TO DO THIS YOU NEED TO know:
• What is a Balance Sheet?
• What does it show you?
• What is an Income Statement?
• What does it show you?
• How can you use this information to assess the financial health of a
business?
• Return on sales
• Current ratio
• Debt-to-equity ratio
Why use financial statements?
• Cannot rely solely on bank account…
Why use financial statements?
Cannot rely on bank account
BANK
ACCOUNT
AFTER
4 WEEKS
HAS
THIS
BUSINESS
MADE A
PROFIT?
Why use financial statements?
• They summarize how your business is doing
Two main financial statements
• Balance Sheet
Classifies & Summarizes Bank Statements
• Income Statement
What is a Balance sheet?
• A financial statement that shows;
• What the business OWNS and what it OWES.
• Assets
• Liabilities and Owner’s Equity
balance sheet
• What the business owns
Assets
• What the business owes
Liabilities and Owner’s Equity
• Liabilities
• What the business owes to others
• Owner’s Equity
• How much the business has made
(lost) since it started
Format of balance sheet
What the business owns
BizCafe
Balance Sheet
August 1, 2019
ASSETS
What the business owes
LIABILITIES & OWNER’S EQUITY
Cash
$25,300 Loan
$25,000
Deposits
$2,500
Inventory
$2,200
Equipment
$16.400 Owner’s Equity/Retained
Earnings
$21,400
Total
$46,400 Total L & OE
$46,400
ASSETS = LIABILITIES & OWNER’S EQUITY
EXAMPLE: Bizcafe
balance sheet with loan
• What does your BizCafe Balance Sheet look like after you received the
$25,000 loan, but before you bought anything for the business?
$25,000
LOAN
Jane
Valdez
YOUR
BIZCAFE
HOW DOES THIS SHOW UP
AS AN ASSET?
HOW DOES THIS SHOW AS
PART OF LIABILITIES &
OWNERS EQUITY?
HOW SHOW
ON
BALANCE SHEET?
EXAMPLE: Bizcafe
balance sheet with loan
• What does your BizCafe Balance Sheet look like after you received the
$25,000 loan, but before you bought anything for the business?
BizCafe
Balance Sheet
August 1, 2019
ASSETS
Cash
LIABILITIES & OWNER’S EQUITY
$25,000 Loan
Owner’s Equity
Total
NOTE: Date is important
$25,000 Total L & OE
$25,000
$0
$25,000
Bizcafe:
balance sheet with owner investment
• What does your BizCafe Balance Sheet look like if you invested
$25,000 of your own money, but before you bought anything for the
business?
$25,000
INVEST
YOU
This Photo by Unknown Author is licensed under CC
BY-SA
YOUR
BIZCAFE
HOW SHOW
ON
BALANCE SHEET?
Bizcafe:
balance sheet with owner investment
• What does your BizCafe Balance Sheet look like if you invested
$25,000 of your own money, but before you bought anything for the
business?
BizCafe
Balance Sheet
August 1, 2019
ASSETS
Cash
LIABILITIES & OWNER’S EQUITY
$25,000 Loan
Owner’s Equity
Total
$25,000 Total L & OE
$0
$25,000
$25,000
Bizcafe:
balance sheet with loan
• What does your BizCafe Balance Sheet look like after you buy a
$3,000 espresso machine, spend $2,000 on furniture from the
$25,000 loan before you open for business?
$3,000
HOW SHOW
ON
BALANCE SHEET?
$25,000
$2,000
Bizcafe:
balance sheet with loan
Buy
BizCafe
Balance Sheet
August 30, 2019
ASSETS
Cash
LIABILITIES & OWNER’S EQUITY
$20,000 Loan
$25,000
Equipment:
Espresso machine
$3,000 Owner’s Equity
Furniture
$2,000
Total
$25,000 Total L & OE
$0
$25,000
Format of balance sheet
Assets
• What the business owns
=
Liabilities and Owner’s Equity
• Liabilities
• What the business owes
• Owner’s Equity
• How much the business has made
(lost) since it started
ASSETS = LIABILITIES & OWNER’S EQUITY
Format of balance sheet
HOW DO PROFITS SHOW ON THE BALANCE SHEET?
Assets
• What the business owns
=
Liabilities and Owner’s Equity
• Liabilities
• What the business owes
• Owner’s Equity
PROFIT
• How much the business has made
(lost) since it started
Example of bizcafe balance sheet-1
This BizCafe has lost money!
Example of bizcafe balance sheet-2
This BizCafe has made a profit!
Income statement
PROFIT = SALES - COSTS
• A financial statement that shows;
• How much money a business made (or lost) over a period of time.
Bizcafe:
income statement
• From Sept. 21 to Oct. 31, 2019;
• Sales of $18,000
• Costs:
• $600
• $8,000
• $2,500
• $6,000
• What’s left?
$900
Bizcafe
income statement
BizCafe
Income Statement
Sept. 25, 2019- Oct. 31, 2019
Sales
$18,000
Less:
Cost of Goods Sold
$600
Gross Margin
$17,400
Less: Expenses
Wages & Salaries
$8,000
Rent
$2,500
Advertising/Promo
$6,000
Total Expenses
$16,500
Net Income
$900
Classifies expenses
so reader can better
understand how the
business operates.
Example of bizcafe income statement-1
Financial statements summary
• Balance Sheet- what a business owns, owes & accumulated profit (or
loss)
• Income Statement- how much money a business made or lost over a
period of time
Financial ratios
• Taken from financial statements
• Used to assess business performance
Financial ratios:
profitability
“Return On Sales”
• How much profit does the business make from every $ of sales
• Taken from Income Statement
• Net Income ÷ Revenue= Return on Sales
• Shows how well a business can control it’s costs
• Higher is better
What is the “return on sales”?
PERFECT ROAST
INCOME STATEMENT
Sept. 1- Oct. 31, 2018
Revenue
COGS
Gross Margin
Year to Date
$94,808
$8,772
$86,036
Management
Staff
Adv./Promo.
Rent
Utilities
Depreciation
Expense
Interest on Loan
Other
Total Expenses
$20,371
$15,840
$24,920
$4,000
$550
Net Income
$18,498
$440
$417
$1,000
$67,538
Return On Sales:
Net Income / Total Sales
$18,498 / $94,808 =
19.5%
WHAT DOES
THIS
TELL YOU?
Financial ratios:
liquidity
“Current Ratio”
• Shows the ability of a business to meet it’s short term debt obligations
• Taken from the Balance Sheet
• Current Ratio = Current Assets ÷ Current Liabilities
• Higher means it’s easier for the business to meet it’s shorter term debts.
What is the “current ratio”?
Assets
Current Assets
Cash
Deposits
Equipment
Accumulated Depreciation
Inventory
Prepaid Exp.
Total Assets
Liabilities & Owner’s Equity
Current Liabilities
$24,655 Taxes Payable
$2,500 Loans
$14,400 Total Liabilities
-$440
$1,382 Equity
$1,000.00 Retained Earnings
Total Equity
$43,497 Total Liab. & Eq.
$0
$25,000
$25,000
$18,497
$18,497
$43,497
Current Ratio:
Current Assets / Current Liabilities
$43,497 / $25,000 =
1.74
WHAT DOES
THIS
TELL YOU?
Financial ratios:
leverage
“Debt To Equity Ratio”
• Shows how much of a company is financed using debt
• Taken from the Balance Sheet
• Debt to Equity Ratio = Total Liabilities ÷ Total Owner’s Equity
• A ratio bigger than 1 means the business has more debt than equity
• Higher ratio means a higher risk for lenders and investors.
What is the “debt to equity ratio”?
Assets
Current Assets
Cash
Deposits
Equipment
Accumulated Depreciation
Inventory
Prepaid Exp.
Total Assets
Liabilities & Owner’s Equity
Current Liabilities
$24,655 Taxes Payable
$2,500 Loans
$14,400 Total Liabilities
-$440
$1,382 Equity
$1,000.00 Retained Earnings
Total Equity
$43,497 Total Liab. & Eq.
Debt to Equity Ratio:
$0
$25,000
$25,000
$18,497
$18,497
Total Liabilities/ Owner’s Equity
$25,000 / $18,497 =
$43,497
1.35
WHAT DOES
THIS
TELL YOU?
Ice 6: Financial ratios
Return on Sales
(Income Statement)
Current Ratio
(Balance Sheet)
Net Income / Total Sales
Current Assets / Current Liabilities
Total Debt / Owner’s Equity
Show as %
Show as ratio
Show as ratio
Shows how much profit is
made from each $ of sales
Shows ability to meet debt obligations
due within one year
Shows how much of the business is
financed by debt
Debt to Equity
(Balance Sheet)
What you should know now:
• What is a Balance Sheet?
• What does it show you?
• What is an Income Statement?
• What does it show you?
• How can you use this information to assess the financial health of a
business?
• Return on sales
• Current ratio
• Debt-to-equity ratio
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