Accounting & Understanding Financial Accounting & Understanding Financial Statements...

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  • 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.

  • 2

    Agenda

     Types of Financial Statements

     Format of Each Financial Statement

     Setting Up Your Financial Statements

     Understanding Financial Statements

     Financial Calculators

     Discussion

  • 3

    Types of Financial Statements

    Three Main Financial Statements

     Balance Sheet

     Income Statement or Profit and Loss (P & L)

     Cash Flow Report

  • 4

    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

  • 5

    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

  • 6

    Format of Financial Statements Balance Sheet

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

     Total of Assets = Total of Liabilities + Equity

  • 7

    Format of Financial Statements What is an Asset?

     Everything you own that will provide a future benefit

     Current assets

     Fixed assets

     Notes receivable

  • 8

    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

  • 9

    Format of Financial Statements

     Fixed Assets

     Land

     Buildings

     Furniture or Leasehold Improvements

     Equipment or Machinery

     Less Accumulated Depreciation ___________________________

     Total Property and Equipment

  • 10

    Format of Financial Statements  Notes Receivable

     Other Assets ______________________

    Total Assets

  • 11

    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

  • 12

    Format of Financial Statements

     Long-Term Liabilities

     Notes Payable (long-term)

     Notes Payable - shareholder ______________________________

     Total Long-Term Liabilities

    Total Liabilities

  • 13

    Format of Financial Statements

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

     Total Equity

    Total Liabilities and Equity

  • 14

    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)

  • 15

    Format of Financial Statements

    Income

     Revenue from sales of goods

     Fees for services

    COGS

     Raw materials

     Direct labor

     Direct expenses

  • 16

    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

  • 17

    Format of Financial Statements

    Operating Expenses (G & A)

     Indirect Labor, Payroll Taxes

     Rent, Utilities

     Postage, Printing

     Insurance

     Employee Benefits

     Depreciation

     Advertising

  • 18

    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)

  • 19

    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)

  • 20

    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)

  • 21

    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

  • 22

    Setting Up Your Financial Statements

    Financial Statements

     Balance Sheet

     Income Statement

     Cash Flow Report

  • 23

    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?

  • 24

    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

  • 25

    Understanding Financial Statements

     4 types of financial ratios:

    Liquidity ratios

    Safety ratios

    Profitability ratios

    Efficiency ratios

  • 26

    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

  • 27

    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

  • 28

    Understanding Financial Statements

    Liquidity Ratios

    Current Ratio = Current Assets Current Liabilities

    Working capital

     Above 1:1 and close to 2:1

    Quick Ratio = Cash + A/R Current Liabilities

     Generally 1:1 is good

  • 29

    Understanding Financial Statements

    Liquidity Ratios

     Inventory to Working Capital Ratio =

    Inventory Total Current Assets – Total Current Liabilities

     % of working capital made up of inventory

     Number will be less than 1

  • 30

    Understanding Financial Statements

    Safety Ratios

    Debt to Equity Ratio = Debt Equity

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

  • 31

    Understanding Financial Statements

    Profitability Ratios

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

    Last Year’s Sales

  • 32

    Understanding Financial Statements

    Profitability Ratios

    Gross Profit Margin = Gross Profit Total Sales

    Net Profit Margin =

    Net Profit Total Sales

  • 33

    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

  • 34

    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

  • 35

    Understanding Financial Statements

    Efficiency Ratios

    Days in Receivables = Average A/R