financial statements powerpoint

Financial Statements

4 Types of Financial Statements

1. Income Statement

2. Balance Sheet

3. Statement of Owner’s Equity3. Statement of Owner’s Equity

4. Statement of Cash Flows

Adequate Disclosure

Businesses communicate financial information to the public using information to the public using

financial statements.

Terminology

�Elements – classes or categories in which the items reported in the financial reported in the financial statements are organized

�Accounts – sub classification of elements

10 Elements

1. Assets

2. Liabilities

6. Expenses

7. Distributions

3. Equity

4. Common Stock

5. Revenue

8. Net Income

9. Gains

10.Losses

Terminology

� Ledger – group of accounts

� General Ledger – contains all accounts needed to prepare a accounts needed to prepare a financial statement

� Chart of Accounts – table listing all accounts used by company, usually have account numbers assigned

5 General Ledger Categories

1. Assets – 100’s

2. Liabilities – 200’s

3. Owner’s Equity – 300’s

4. Revenue – 400’s

5. Expenses – 500’s

File Maintenance

�Procedure for arranging accounts, assigning account numbers, and keeping records.numbers, and keeping records.

�Number by account type, then new accounts are added using 10’s

Chart of Accounts Rules

� Cash is always the first account under assets.

� Assets organized based on liquidity.� Assets organized based on liquidity.� Liquidity – ease with which an assets can

be converted to cash.

� Individual expense accounts are listed alphabetically in expense category

Income Statement

� Report of a company’s operating performance, in financial terms, over a period of time.

� Accounting Period – is the time period covered by the financial statement.

5 Major Parts of Income Stmt.

1. Revenue

2. Cost of Goods Sold

3. Gross Profit3. Gross Profit

4. Operating Expenses

5. Net Income (or Net Loss)

Income Statement Heading

Identifies 4 Parts

1. Name of company

2. Name of financial statement

3. Date

4. Unit of Measurement

5 Steps How to Prepare an Income Stmt.

1. Find and record Net Sales

a. Record gross sales

b. Record sales returns & allowances

c. Subtract sales returns & allowances from c. Subtract sales returns & allowances from gross sales

Net sales = Gross sales – Sales returns & allowances

5 StepsHow to Prepare an Income Stmt.

2. Find and record Cost of Goods Sold

a. Record cost of beginning inventory

b. Record cost of purchases

c. Record cost of ending inventory

d. Add cost of beginning inventory and purchases, then subtract ending inventory.

Cost of Goods Sold = Beginning Inv.

+ Purchases

– Ending Inv.


3. Find and record Gross Profit from Sales

Gross Profit = Net Sales – Cost of Goods Gross Profit = Net Sales – Cost of Goods Sold

5 StepsHow to Prepare an Income Stmt.

4. Find and record Total Operating Expenses

a. List the operating expenses

b. Subtotal their expensesb. Subtotal their expenses


5. Find and record Net Income (Net Loss)

Net Income = Gross Profit from sale Net Income = Gross Profit from sale

- Operating Expenses

Revenue

� Earned from the sale of goods or services to customers.

� Accounts Receivable (A/R) – sales in � Accounts Receivable (A/R) – sales in which payment is collected at a later date.

Sales Returns & Allowances

�Occur when a company issues refunds or price allowances to customers for returned goods.customers for returned goods.

�Decreases sales

Sales Returns &

Net sales = Sales – Allowances

Expenses

� Dollar amount of resources the entity used to earn revenue during the time period.

� Expenses reported in one accounting period may actually be paid for in another.

Terminology

� Net Sales – difference between the total sales and the sales returns & allowances

� Gross Profit / Gross Margin –� Gross Profit / Gross Margin –difference between the Net Sales and the Cost of Goods Sold

� Operating Expense – overhead or cost incurred in operating the business.

Cost of Goods Sold

� Expense directly related to buying or producing the goods sold.

BeginningBeginning

Cost of Goods Sold = Inventory

+ Purchases

– Ending Inventory

Cost of Goods Sold Cont..

� Beginning Inventory – how much the value of goods is the beginning of the accounting period.

� Purchases – any additional purchases � Purchases – any additional purchases made during the period to increases product (Goods available for sale)

� Ending Inventory – inventory that is counted and remains at the end of the accounting period.

Net Income (Net Loss)

� Bottom Line

� Net Income = Revenue > Expenses� Total revenue is greater than total expenses

� Net Loss = Revenue < Expenses� Total expenses exceed total revenue

� Break Even = Revenue = Expenses

Underlining Totals

� Single Underline – used to indicate the result of addition or subtraction that is a subtotal.

� Double Underline – indicates the result of addition or subtraction that is a GRAND total.

When to use $..

� Only use for the first amount in a list of values

� Use for grand “Totals” � Use for grand “Totals”

� Advantage – Makes totals easier to locate

Income Statement Handouts

Balance Sheets

� Describes the financial situation of a company at a specific point in time.

� Name comes from the accounting � Name comes from the accounting equation – which must always be in balance.

� Represents a company’s net worth.

Balance Sheet Heading

4 Parts

1. Name of the company

2. Name of financial statement2. Name of financial statement

3. Date (Specific Date)

4. Unit of Measure

3 Categories

1. Assets – located on left side

2. Liabilities – located on right side

3. Owner’s Equity – located on right side

Balance Sheet Elements

� Assets – economic resources owned by the company

� Current assets vs. Long-Term assets� Current assets vs. Long-Term assets

� Measured at total cost incurred to acquire it.

Current vs. Long-Term Assets

Current

� Assets that are normally turned into cash within one year

Long-Term

� Property / Plant� Building

� Equipmentone year

� Accounts Receivable

� Inventories

� Equipment

� Long-term in nature, over one year

Liabilities

� Company’s debts or obligations

� Current vs. Long-term

� Normal credit balance

Current vs. Long-Term

Current liabilities

� must be paid within one year

Long-term liabilities

� paid over a period of more than one year

� Accounts Payable –from the purchase of goods or services from suppliers

year

� Notes Payable –cash borrowed from lending institution

Owner’s Equity

� Also known as Stockholder’s Equity

� Amount of financing provided by owners of the business and earningsowners of the business and earnings

� Terms: Capital, Drawing, and Retained Earnings

Terms of Owner’s Equity

� Capital – investment of cash or other assets by the owner for the business.

� Drawing – withdrawals of cash or � Drawing – withdrawals of cash or product from the business for owner’s personal use.

� Retained Earnings – amount of earnings (profits) reinvested in business.

5 Steps How to Prepare a Balance Sheet

1. Find and record Total Assets

a. List the Current Assets, with a single line under the last entry

b. Add entries and record the total current b. Add entries and record the total current assets, draw single line underneath total.

c. Repeat (a) and (b) for Property, Plant, and Equipment Assets

5 StepsHow to Prepare a Balance Sheet

Continue Step 1

d. Add category totals and draw double line underneath the grand total.

Total assets = Total Current Assets + Total Plant & Equipment


2. Find and record the Total Liabilities

a. Repeat step 1(a) for Current Liabilitiesand step 1(b) for Total Current LiabilitiesLiabilities

b. Repeat step 1(a) for Long-term Liabilities and step 1(b) for Total Long-Term Liabilities


Continue step 2

c. Add the category totals and draw a double line underneath the grand total

Total Liabilities = Total Current Liabilities

+ Total Long-Term Liabilities


3. Find and record Total Owner’s Equity

a. List the equity entries, capital and drawing, and draw a single line underneath the last entryunderneath the last entry

b. Add the entries and draw a single line underneath the total.


4. Find and record the Total Liabilities and Owner’s Equitya. Add Total Liabilities to the Total Owner’s

Equity and draw a double underline underneath the grand totalunderneath the grand total

Total Liabilities and Owner’s Equity

= Total Liabilities + Total Owner’s Equity


5. Confirm that the double underline grand totals from step 1 = step 4

Total Assets = Total Liabilities Total Assets = Total Liabilities

+ Total Owner’s Equity

Balance Sheet Handouts

Statement of Owner’s Equity

� Also called:

� Statement of Stockholder’s Equity

� Statement of Retained Earnings

� Reports how net income and distribution of dividends affected the company’s financial position during the accounting period.

Statement of Owner’s Equity

� Net income = increases Retained Earnings

� Declaration of dividends to � Declaration of dividends to stockholders (drawings) = decreases retained earnings

Beg. R/E + Net Income – Dividends

= Ending Retained Earnings

Statement of Owner’s Equity Heading

4 Parts

1. Company Name

2. Statement of Owner’s Equity

3. Date / Time Period

� For the Year Ended December 21, 20xx

4. Unit of measure

� (in thousands of dollars)

Statement of Cash Flows

� Divides cash inflows (receipts) and outflows (payments) into 3 categories:

1. Cash Flow from Operating Activities1. Cash Flow from Operating Activities

2. Cash Flow from Investing Activities

3. Cash Flow from Financing Activities


4 Parts of Heading

1. Company name

2. Title: Statement of Cash Flows

3. Date / Time Period

4. Unit of Measure Used


+/- Cash Flows from Operating Activities (CFO)

+/- Cash Flows from Investing Activities (CFI)

+/- Cash Flows from Financing Activities (CFF)+/- Cash Flows from Financing Activities (CFF)

_______________________________________

Change in Cash

Elements ofStatement of Cash Flows

� Cash Flow from Operating Activities –directly related to earning income

� Cash received from customers

� Cash payments from normal daily � Cash payments from normal daily activities

Elements ofStatement of Cash Flows

� Cash Flow from Investing Activities –related to the acquisition or sale of the company’s productive assets� Productive Assets = Purchases required

to help business keep up with demand� Productive Assets = Purchases required

to help business keep up with demand

� Cash Flow from Financing Activities –directly related to the financing of the business� Receipt or payment of money to

investors and creditors

Relationship of Financial Statements

1. Net income from Statement of Income results in an increase in ending capital on the Statement of Owner’s Equity.

2. Ending capital from Statement of Owner’s 2. Ending capital from Statement of Owner’s Equity is the value of Owner’s Equity on the Balance Sheet.

3. Change in cash on the Statement of Cash Flows added to beginning cash is equal to end of year cash on the Balance Sheet.

Analysis of Financial Statements

� Investors are the largest group of people who use financial statements.

� Understand business strategy –� Understand business strategy –present and past history of profits

3 Methods of Comparisons

1. Horizontal Analysis

2. Vertical Analysis

3. Ratio Analysis

Horizontal Analysis

� % analysis of increases and decreases in related items in comparative financial statements.

� Compare each item from current financial statement to one or more prior financial statements.

Horizontal Analysis cont.

� List amount of increase or decrease for each item.

� Calculate the % of increase or � Calculate the % of increase or decrease for each item.

� Amount of increase/decrease divided by prior year = % change

Vertical Analysis

� % analysis used to show the relationship of each component to the total within a single statement.

� Example: % of current assets is Current Assets/Total Assets

Vertical Analysis cont.

� For income statement:

� Sales / Net Sales

� Sales Returns & Allow. / Net Sales

� COGS / Net Sales� COGS / Net Sales

� Selling Expense / Net Sales

� Income / Net Sales

� Net Income / Net Sales

Key Performance Indicators

� Ratio Analysis –expresses the proportionate relationship between 2

� 5 Key Performance Indicators:

1. Profit Margin

2. Debit Ratio

between 2 different amounts, allows for easier comparison

3. Current Ratio

4. Return on Assets

5. Inventory Turnover

Profit Margin (%)

� Net income or profit expressed as a % of sales

� Used to measure a company’s � Used to measure a company’s profitability

Net Income / Sales = Profit Margin %

Debt Ratio (%)

� % to which assets are purchased through debt (liabilities)

� Finance assets through debt or stock

� Primary measure to gauge the degree a company is leveraged or financed through debt

Total Debt / Total Assets =Debt Ratio (%)

Current Ratio (#)

� Ratio of current assets to current liabilities representing the number of times a company can pay debts through current assets.through current assets.

� Solvency– ability of company to pay back debt.

Current Ratio (#) cont.

� Measure of company’s liquidity (how quickly company can turn non-cash assets into cash)

� Measure of company’s ability to met future obligations (pay future debt)

Current Assets / Current Liabilities = Current Ratio (#)

Return on Assets (ROA) %

� Net income or profit is expressed as a % of total assets.

� What is the net income produced by a � What is the net income produced by a company’s assets?

� Measure of efficiency and profitability

Return on Assets (ROA) % cont.

Net Income / Average Total Assets*= ROA (%)

*Avg. Total Assets=

(Current year Total Assets + Prior year Total Assets)/2

Inventory Turnover

� Number of times a company sells its inventory in a year.

� Primary measure of a company’s � Primary measure of a company’s ability to sell or “move” inventory

Inventory Turnover cont.

COGS / Average Inventory* =

Inventory Turnover

*Avg. Inv. =

(Current year inv. + Prior year inv.)/2

Handouts

� Analyzing Income Statements and Balance Sheets 15.3.1

� Taking Care of Business #1� Taking Care of Business #1

Calculations

Chapter 16

Break-even Analysis

Fixed vs. Variable Costs

� Fixed costs are costs that stay the same from period to period.� Not directly related to volume of

production

� Examples: rent and insurance

� Variable costs are costs that change based on number of units produced.� Examples: materials and labor

Fixed vs. Variable Costs cont.

Fixed Cost per unit =

Total Fixed Cost / # of units produced

Total Variable Costs =

Variable Cost per unit * # of units

produced

Break-even Point

� Point when Profit = $0.00

� Revenue exactly equals expenses

� Until a break-even point is reached the company will incur a loss

Break-even Point cont.

Basic Equation:

Revenue

– Variable Cost

– Fixed Cost

Expanded Equation:

(Sales price/unit * x)

- (Variable cost/unit * x)

- Total Fixed Cost– Fixed Cost

= $0

- Total Fixed Cost

= $0

X = number of units to be sold to break-even

Contribution Margin

� Profit per unit

Sales price per unit

– variable cost per unit – variable cost per unit

= profit per unit

� Until break-even point is reached, “profits” per unit contributes paying for the fixed costs.

Break-even

� Handout 16.1.1

� Taking Care of Business #3

“Proving the Price is Right”

Chapter 17

Productivity

Productivity

� Companies assess how well they use resources and in what ways improvements could be made to be more productive.more productive.

� 2 Types:

� efficiency

� effectiveness

Efficiency

� Measures how well a company uses its resources (inputs)

� Compares actual inputs to expected � Compares actual inputs to expected inputs

� Examples: material and time expected to make a product

Efficiency cont.

Efficient =

actual inputs < expected inputs

Inefficient =

actual inputs > expected inputs

Effectiveness

� Determines how well the final product (output) is made.

� Compares how well the product is � Compares how well the product is made to how well it should have been made.

Effectiveness cont.

� Effective = employee produces the desired amount of product in a specific time

� Ineffective = employee does not produce enough products or if the products produced do not meet minimum standards

Quality Control

� One way to measure productivity

Percent defective = Number Defective /Total Number CheckedTotal Number Checked

� Standard percent is 5%, however individual companies determine appropriate percent of defective products

Productivity

� Taking Care of Business #4

“From Air to Market”

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