Accounting & Understanding Financial Statements · Accounting & Understanding Financial Statements...
Transcript of Accounting & Understanding Financial Statements · Accounting & Understanding Financial Statements...
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
Evaluation Survey – Link will be emailed to you after this class
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