Welcome to Financial Series #2
The Balance Sheet
Your Hosts for Today’s Conference are:
Gary Elekes in Nashville, Tennessee
Gary Oetker in Plano, Texas
Conference Objectives:

Review Balance Sheet fundamentals.

Review the key components of the Balance
Sheet and the critical information needed to
manage a company.

Review how inventory, depreciation,
warranty reserve and service agreement
reserve transactions affect Balance Sheet
Agenda for Conference
Review
the basic layout and terminology of the
Balance Sheet
Review the Balance Sheet equation
Review depreciation transactions
Review inventory transactions
Review warranty reserve transactions
Review service agreement reserve transactions
Review key points in using the Balance Sheet as
a tool to manage company performance
Beginning Terminology
Assets
Current
Assets
Fixed Assets
Liabilities
Current Liabilities
Long-Term Liabilities
Net Worth (Owner’s Equity)
The Balance Sheet
Basic Equation:
ASSETS
= LIABILITIES
+ NET WORTH
Or
ASSETS
- LIABILITIES
= NET WORTH
Balance Sheet Example
ASSETS
LIABILITIES & NET WORTH
Cash
$20,000
Liabilites
Truck
$20,000
Owner's Investment $25,000
TOTAL ASSETS
$40,000 TOTAL LIABILITIES
& NET WORTH
$15,000
$40,000
Balance Sheet Format
Current Asset Accounts
Current Liabilities
Cash
Accounts Receivable
Notes Receivable
Inventory
Work In Process
Prepaid Expenses
Other Current Assets
Accounts Payable
Notes Payable
Current Portion of Long-Term Debt
Accrued Expenditures
Reserve Accounts
Customer Deposits
Other Current Liabilities
Fixed Assets
Mortgages Payable
Bonds Payable
Long Term Notes Payable
Property, Plant & Equipment
Vehicles
Improvements on Leased Building
Less: Accumulated Depreciation
Long Term Liabilities
Stockholder Equity
Capital Stock
Retained Earnings
Sample Balance Sheet
Dollars
%
Assets:
Current Assets
Cash
Accounts Receivable
Notes receivable
Inventory
Prepaid Expenses
Other Current Assets
Total Current Assets
$
$
$
$
$
$
$
36,900
308,250
43,800
3,100
12,500
404,550
Fixed Assets
Plant & Equipment
Machinery
Less: Accumulated Depreciation
$
$
$
61,700
70,000
(54,230)
Net Fixed Assets
$
77,470
16%
Other Assets
$
10,000
2%
$
492,020
100%
Total Assets
7%
63%
0%
9%
1%
3%
82%
Sample Balance Sheet (cont.)
Liabilities
Current Liabilities
Accounts Payable
Notes Payable
Accrued Expenditures
Warranty Reserve
Other Current Liabilities
Total Current Liabilities
$
$
$
$
$
$
55,500
71,900
2,110
4,500
9,200
143,210
11%
15%
0%
1%
2%
29%
Long Term Liabilities
$
38,210
8%
$
181,420
37%
Capital Stock
Retained Earnings
$
$
87,500
223,100
18%
45%
Total Net Worth
$
310,600
63%
$
492,020
100%
Total Liabilities
Net Worth
Total Liabilities & Net Worth
Special Balance Sheet Transactions
Depreciation
Inventory
Reserve
Accounts
Warranty
Reserve
Service Agreement Reserve
Start-Up Reserve
Depreciation
Depreciation
Accounts
Depreciation
Expense
Accumulated
Depreciation
Depreciation
Straight
Methods
Line Depreciation
Accelerated Depreciation
Depreciation Flow Example
Company
Purchases
Truck
At The End Of The Year
Part Of The Trucks Useful
Life Is Over
At The End Of The Year
The Income Statement
Includes Annual
Depreciation
Expense Of Truck
Inventory Flow Example
Equipment Is
Purchased For
Warehouse
The Cost Is
Placed Into
The Inventory
Account
Equipment Is Then
Used On A Job
The Cost Is Transferred
To Cost Of Sales
- Equipment
The Income Statement
Shows Revenue For
Job And The Cost Of Sale
Warranty Reserve
Recognizes
the liability associated with an
equipment sale (1 year labor)
At the time of sale:
Warranty
is a cost of sales line item
Generally dollar amount is calculated as a
percentage of the sale
Money is transferred to warranty reserve account on
Balance Sheet
Warranty Reserve (cont)
When
warranty work is performed:
Expenses
are charged to a warranty labor and a
warranty parts expense accounts.
Warranty part credits are credited to the warranty
parts expense account when they’re received.
At the end of the month the warranty reserve
account is adjusted to balance the warranty
expense accounts. It should be a wash.
Warranty Reserve (cont)
Think
of the warranty reserve account as a
bucket
 If
the bucket runs dry, you’re warranty costs are higher than
what you planned for. You’ll need to increase the warranty
amount set aside on each job.
 If you’re warranty costs come in less than expected, the
bucket will be full and overflowing. At the end of the year,
you’ll need to make adjustments to recognize this additional
gross margin.
Using the Balance Sheet
To
determine what the warranty reserve should be
To determine what the service agreement reserve should be
To determine the value of your company
To determine how company profits compare to the owner’s
investment
The Income Statement focuses on company
profitability. The Balance Sheet focuses on the
overall health of the company.
The Balance Sheet provides key financial
information for management in terms of financial
ratios.
Working Capital
Net Working
Capital
=
Current
Assets
-
Current
Liabilities
Working Capital should equal 10% of annual sales
Profits retained in a company provide the working
capital needed for growth
A lack of Working Capital can create cash flow
problem
Other Financial Ratios are covered in another
Coaching Conference
Questions
&
Answers