CHAPTER Section 11.1 Income Statements & Cash Flow Section 11.2 The Balance Sheet FINANCIAL STATEMENTS

Section 11.1 IncomeStatements & Cash Flow

Section 11.2 The Balance Sheet

OBJECTIVES

Explain the importance of an income statement Identify the parts of an income statement Prepare an income statement Understand how cash flow affects entrepreneurs Demonstrate a burn-rate calculation

2Section 11.1: Income Statements & Cash Flow

Income statements are prepared periodically to show how a business is performing: Monthly Quarterly Annually

Income statements differ in how they show their variable expenses. They may appear under: Cost of Goods Sold Cost of Goods Manufactured and Sold Cost of Services Sold


Income statements generally include these parts: Revenue. The money the business receives from

selling products or services. Cost of Goods Sold. The cost of producing the

goods or services. Gross Profit. Net sales minus the cost of goods

sold. Operating Expenses. The expenses of running the

business. Pre-Tax Profit. Gross profit minus the operating

expenses. Net Profit (Loss). Pre-tax profit minus taxes.




To prepare an income statement:1. Determine the business's Revenue.2. Calculate the Cost of Goods Sold.3. Determine the Gross Profit.4. Calculate Operating Expenses. 5. Determine the Pre-Tax Profit.6. Determine the Net Profit or Loss.

7Section 11.2: The Balance Sheet

The cash flow equation is:

A cash flow statement is a financial document that records inflows and outflows of cash when they actually occur.


Five ways to avoid being caught without enough cash to

pay your bills are:

1. Collect Cash as Soon as Possible2. Pay Bills Close to the Due Date3. Keep Track of Your Cash4. Lease Equipment5. Keep Inventory to a Minimum

Cash flow is cyclical for many businesses, meaning that it

varies according to the time of year.


Use the burn rate to calculate how long a company can go without revenue.


OBJECTIVES

Identify the purpose and components of a balance sheet

Explain how balance sheets are prepared Provide two methods used to analyze balance

sheets


The balance sheet focuses on the fundamental accounting equation:

Assets include everything owned by the business that has a monetary value.

Liabilities include any outstanding bill or loan that must be repaid.

The value of the business on a specific date is referred to as the owner’s equity.


Assets are the items of value owned by a business. Short-term assets that can be converted into cash

within one year are current assets. Assets that usually take longer than one year to turn

into cash are long-term assets.

Liabilities are all sums of money owed by the business. Short-term debts that must be repaid within one year

are current liabilities. Debts that usually take longer than one year to repay

are long-term liabilities.


To prepare a balance sheet:1. Determine the value of the company’s assets.2. Establish the value of the business’s long-term assets.3. Verify the company’s total liabilities.4. Determine the value of the business’s long-term

assets.5. Calculate the business's long-term liabilities.6. Determine the owner’s equity.


A business usually prepares one balance sheet at the beginning of its fiscal year and another at the end of it and compares them to determine whether the business is succeeding or not.

Using the Comparative Balance Sheet method, a business can see what has changed after one year by checking the differences between the beginning and ending balances.

With Same-Size Balance Sheet Analysis, a percentage column is added so that the business can quickly see the percentage change in all balance sheet items from one year to the next.


Documents

CHAPTER Section 11.1 Income Statements & Cash Flow Section 11.2 The Balance Sheet FINANCIAL STATEMENTS