WHAT ARE FINANCIAL STATEMENTS?

✓ Retained earnings

The summarized results of your business financial

FINANCIAL STATEMENTS
transactions over a designated period of time. They will
show total income, expenses, cash balances, level of *Income Statement
* Balance Sheet
debt, and much more.
* Statement of Cash Flow
ACCOUNTS
* today’s class will focus on the income statement and
Accounts are the categories into which the effects of balance sheet
transactions are recorded, and from which financial
Income Statement / Profit & Loss Statement (P&L)
reports are created.
✓ Shows the performance of your business over a
5 MAJOR ACCOUNT CATEGORIES: period of time
✓ Resets at the beginning of each new accounting
✓ Income-Proceeds from sales period
✓ Expenses-Costs of operation ✓ Summarizes all revenue generated by the
✓ Assets-What you own business
✓ Liabilities-What you owe ✓ Summarizes all expenses incurred by the
✓ Equity-Net worth / level of investment business (by category)
✓ Calculates the net profit or loss, or <bottom line=
= Income – Expenses
CHART OF ACCOUNTS ✓ Tells you how well your business is operated

Sample Income accounts

✓ Sales revenue
✓ Other income
Sample Expense accounts
✓ Rent
✓ Cost of Goods Sold (COGS)
✓ Marketing
✓ Office supplies
✓ Payroll
✓ Professional fees
Sample Asset accounts
Current assets
✓ Cash
✓ Inventory
✓ Accounts receivable
Fixed assets
✓ Equipment
✓ Property
Sample Liability accounts
✓ Accounts payable
✓ Credit card payable
✓ Loan payable
Sample Equity accounts
✓ Owner’s equity Reviewing your income statement
 ✓ How is your revenue trending? REVIEWING YOUR BALANCE SHEET
✓ Month-to-month ✓ Liquidity: Can your company meet its payment
✓ Against same period last year (considers obligations?
seasonality) ✓ Cash balance
✓ How are your expenses trending? ✓ Working capital: Current assets – Current
✓ What are your highest categories of expenses? liabilities
✓ Which expenses are fixed vs. variable? ✓ Current ratio: Current assets / Current liabilities
✓ What is your cost of goods sold? ✓ Cash flow management
✓ How do your expenses (as a % of sales) compare ✓ How much inventory do you have? How fast are
to others in your industry? you selling it? Is your inventory on the shelf
collecting dust and interest? Are you doing
Reviewing your income statement will tell you… physical inventories monthly, annually, never?
✓ Are you profitable? ▪ Inventory turns: (COGS / Inventory balance)
✓ What’s your profit margin? ✓ How high is your accounts receivable balance?
✓ Profit / Sales How quickly are you collecting it?
✓ What’s your gross profit margin? ▪ Days sales outstanding: (AR / Sales) * # of days
✓ (Sales – COGS) / Sales in period
✓ Debt management
BALANCE SHEET ● What are your total debt obligations?
✓ Shows a snapshot of your business at a point in ● What is your total equity in the business?
time ● How leveraged is your company?
✓ Accumulates over the lifetime of your business ● Debt-to-equity ratio: Total liabilities / Total
✓ Shows the net worth of your business equity
✓ The balance sheet always balances ASSETS –
LIABILITIES = EQUITY DOUBLE-ENTRY ACCOUNTING

Every business transaction will affect at least two

accounts. If only one side of the entry is done, the
accounting system will become out-of-balance.

Example: You write a check to the newspaper for $100 to

place an advertisement.
✓ Your cash account is reduced by $100
✓ Your marketing expense account is increased by
LINK BETWEEN BALANCE SHEET AND INCOME $100
STATEMENT

Profit or loss is taken from the bottom line of the income

statement and recorded on the balance sheet in the
Retained Earnings equity account. Retained earnings ACCOUNTING METHODS
accumulate over the life of the business.
✓ When a business operates at a profit, it increases Cash-based accounting
in equity (is worth more) ✓ You record transactions when payment is made
✓ When a business operates at a loss, it decreases or received (cash exchanges hands), not when
in equity (is worth less) the business event occurs
Accrual-based accounting
✓ You record transactions when the business event
occurs, regardless of whether payment has yet
been made or received