Accounting & Understanding Financial Statements

Disadvantaged Business Enterprise (DBE) Supportive Services Program

The contents of this training course reflect the views of the author who is responsible for the facts and accuracy of the data presented herein. The contents do not necessarily reflect the official views or policies of the State of California or the Federal Highway Administration. This course outline does not constitute a standard, specification, or regulation.

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Agenda

Types of Financial Statements

Format of Each Financial Statement

Setting Up Your Financial Statements

Understanding Financial Statements

Financial Calculators

Discussion

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Types of Financial Statements

Three Main Financial Statements

Balance Sheet

Income Statement or Profit and Loss (P & L)

Cash Flow Report

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Format of Financial Statements

GAAP – Generally Accepted Accounting Principles

Guidelines for formatting financial statements

Uses double-entry accounting system

Allows for better comparison between companies

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Format of Financial Statements

Balance Sheet

Assets = Liabilities + Equity(Assets – Liabilities = Equity)

Is a snapshot in time – it tells about your business on a specific day

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Format of Financial StatementsBalance Sheet

Divided into three sections: Assets, Liabilities and Equity in that order

Total of Assets = Total of Liabilities + Equity

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Format of Financial StatementsWhat is an Asset?

Everything you own that will provide a future benefit

Current assets

Fixed assets

Notes receivable

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Format of Financial Statements

Assets – List accounts in order of liquidity (nearness to cash)

Current Assets

Cash

Accounts Receivable

Notes Receivable

Inventory

Prepaid Expenses___________________________________

Total Current Assets

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Format of Financial Statements

Fixed Assets

Land

Buildings

Furniture or Leasehold Improvements

Equipment or Machinery

Less Accumulated Depreciation___________________________

Total Property and Equipment

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Format of Financial Statements Notes Receivable

Other Assets______________________

Total Assets

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Format of Financial Statements

Liabilities – List accounts in order of soonest to mature

Current Liabilities

Accounts Payable

Accrued Expenses

Notes Payable (short-term)

Current Portion of Long-Term Debt____________________________

Total Current Liabilities

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Format of Financial Statements

Long-Term Liabilities

Notes Payable (long-term)

Notes Payable - shareholder______________________________

Total Long-Term Liabilities

Total Liabilities

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Format of Financial Statements

Equity Stock (common or preferred) Paid in Capital Retained Earnings Net income (current year)_______________________________

Total Equity

Total Liabilities and Equity

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Format of Financial Statements

Income Statement (Profit & Loss)

Income (Sales, Fees)

- Cost of Sales (COGS)

= Gross Profit (Income minus COGS)

- Operating Expenses (G & A)

= Net Operating Income

+ Other Income (Expense)

= Net Income (Loss)

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Format of Financial Statements

Income

Revenue from sales of goods

Fees for services

COGS

Raw materials

Direct labor

Direct expenses

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Format of Financial Statements

Sales – COGS = Gross Profit

Shows how much the company has made from its core operations

Important to watch gross profit and analyze fluctuations

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Format of Financial Statements

Operating Expenses (G & A)

Indirect Labor, Payroll Taxes

Rent, Utilities

Postage, Printing

Insurance

Employee Benefits

Depreciation

Advertising

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Format of Financial Statements

Gross Profit - Operating Expenses = Operating Income (Profit)

Other Income (Expense)

Revenues not from core operations

Extraordinary income (expense)

Interest income (expense)

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Format of Financial Statements

Operating Income + Other Income (Expense) = Net Profit Before Taxes

Taxes and Dividends

Not deductible items

Will vary from year to year based on profits

Net Income (Loss)

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Setting Up Your Financial Statements

Chart of Accounts

Assets (Current, Fixed or Long-Term)

Liabilities (Current or Long-Term)

Capital (Equity)

Income (Revenue)

Cost of Goods Sold (COGS)

Expenses (Operating)

Other Income (Expenses)

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Setting Up Your Financial Statements

Input Documents

Sales invoices

Deposit slips

Paid bills

Bank statements

Cancelled checks

Payroll records

Tax reports – payroll, sales tax

A/R and A/P reports

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Setting Up Your Financial Statements

Financial Statements

Balance Sheet

Income Statement

Cash Flow Report

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Understanding Financial Statements

When do you look at Balance Sheet?

When do you look at the Income Statement?

What do you do with them once you have them?

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Understanding Financial Statements

Financial Ratios

Meaningless unless it is compared to a standard

Your own prior period ratios

Industry averages

Your own projections and goals

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Understanding Financial Statements

4 types of financial ratios:

Liquidity ratios

Safety ratios

Profitability ratios

Efficiency ratios

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Understanding Financial Statements

Liquidity Ratios

Highlight working capital

Track your progress toward financial stability

Measure your capacity to pay your debts as they come due

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Understanding Financial Statements

Liquidity Ratios

Working Capital Ratio = Current Assets -Current Liabilities

Should be positive number

Represents short-term unencumbered cash

Larger the number the better

Look for consistency and growth over time

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Understanding Financial Statements

Liquidity Ratios

Current Ratio = Current AssetsCurrent Liabilities

Working capital

Above 1:1 and close to 2:1

Quick Ratio = Cash + A/RCurrent Liabilities

Generally 1:1 is good

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Understanding Financial Statements

Liquidity Ratios

Inventory to Working Capital Ratio =

InventoryTotal Current Assets – Total Current Liabilities

% of working capital made up of inventory

Number will be less than 1

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Understanding Financial Statements

Safety Ratios

Debt to Equity Ratio = Debt Equity

1:1 to 4:1 (2:1 usually for small business loans)

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Understanding Financial Statements

Profitability Ratios

Sales Growth = Current Year’s Sales – Last Year’s Sales

Last Year’s Sales

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Understanding Financial Statements

Profitability Ratios

Gross Profit Margin = Gross ProfitTotal Sales

Net Profit Margin =

Net ProfitTotal Sales

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Understanding Financial Statements

Profitability Ratios

Operating Expense Percentage = Operating Expenses

Total Sales

Calculate for total or for each operating expense individually

Used to control operating expenses

Work to decrease percentages

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Understanding Financial Statements

Efficiency Ratios

Sales to Total Assets = Sales

Total Assets

Indicates how efficiently your business generates sales on each dollar of assets

Volume indicator that measures efficiency of your business

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Understanding Financial Statements

Efficiency Ratios

Days in Receivables =Average A/R

Sales X 360 days

Accounts Receivable Turnover =Sales

Average A/R

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Understanding Financial Statements

Efficiency Ratios

Days in Inventory

Inventory Turnover

Days in Accounts Payable

Accounts Payable Turnover

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Understanding Financial Statements

Financial calculators

www.dinkytown.com/java/Ratios.html

www.dinkytown.com/business.html

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Thank you!

Questions & Answers

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