© 2008 tab boards international, inc understanding financial statements
TRANSCRIPT
© 2008 TAB Boards International, Inc
Understanding Financial Statements
© 2008 TAB Boards International, Inc
Company Financial Information
You need to understand your company financial information in order to professionally manage your business.
Money sources look for accurate and current information.
You need to understand your current financials.
© 2008 TAB Boards International, Inc
GAAP (Generally Accepted Accounting Principles)
The sets of standards that govern how most businesses manage their accounting.
© 2008 TAB Boards International, Inc
The Three EquationsThe Accounting Equation
1. Assets = Liabilities + Owner Equity
The Profit Equation2. Profit = Income – Expenses
The Tax Equation3. Taxable Income = Revenue – Deductions
© 2008 TAB Boards International, Inc
The Accounting Cycle Journal Entries record businesses
transactions entered into the “book” of the company from source documents.
Adjusting Entries record activities of the company not triggered by source documents.
Closing Entries bring all operating statements to a zero balance at the end of a accounting period the net P&L are transferred to balance sheet via the retained earnings account.
© 2008 TAB Boards International, Inc
It’s All About the “T” Accounts
3 Common Rules for “T” Accounts
1. There are 5 major categories of accounts
2. Debits on the left, credits on the right
3. Every debit entry must have a credit entry and vice versa
© 2008 TAB Boards International, Inc
The 5 Major Categories
Asset Accts Debit | Credit
Liability Accts Debit | Credit
Equity Accts Debit | Credit
Income AcctsDebit | Credit
Expense AcctsDebit | Credit
© 2008 TAB Boards International, Inc
Table of Debit & Credit Entries
Type of account
If the transaction will Increase the account,Enter it as a . . . .
If the transaction will Decrease the account,Enter it as a . . . .
Asset BalanceLiability SheetEquity StatementsIncome OperatingExpense Statements
DebitCreditCreditCreditDebit
CreditDebitDebitDebitCredit
© 2008 TAB Boards International, Inc
Cash or AccrualCash
Revenue is only recognized when received
Expense is only recognized when paid
Accrual Revenue is recognized when sale is made or
when goods are shipped
Expense is recognized when goods received or services are rendered
© 2008 TAB Boards International, Inc
Cost Tracking A direct expense or cost is directly
traceable to production i.e. labor, material
An indirect expense or cost is not directly traceable to production i.e. general and administrative expenses
A fixed expense or cost remains the same over a relatively broad range of service or sales volume, or production level - rent, insurance salaries
© 2008 TAB Boards International, Inc
Cost Tracking
A variable expense or cost increases and decreases in proportion to changes in service or sales volume, or production level – commissions, labor, materials
A semi-variable expense or cost has both fixed and variable characteristics – utilities, cell phones
© 2008 TAB Boards International, Inc
Capital ExpendituresThree Minimum Criteria
1. Tangible asset2. Minimum useful life of one year3. Meet the minimum monetary cutoff in
accordance with company policy
Six Elements Included in a Capital Budget1. Net purchase price 4. Installation2. Shipping 5. Insurance during shipping3. Sales tax 6. Costs that extend useful life
© 2008 TAB Boards International, Inc
Lease ExpendituresCapital Lease Recorded as a capital expenditure Capitalized costs allocated over future periods Title may revert to lessee depending upon
covenants Cost of execution usually absorbed by lessee
Operating Lease Recorded as rental expense and included in
operating expenses Title remains with lessor throughout lease period Cost of execution usually absorbed by lessor
© 2008 TAB Boards International, Inc
Two Methods of Depreciation Straight-line depreciation is the method
of choice for most organizations. It allocates costs uniformly over the assets useful life.
Accelerated depreciation methods might be chosen to more accurately reflect the market value of an asset. This method results in a shift of depreciation toward the beginning of the asset’s useful life, applying relatively large amounts of depreciation expense in the first years and small amounts in the later years.
© 2008 TAB Boards International, Inc
Four Common Financial Statements
1. Operating Statement (Income Statement or P & L)
2. Balance Sheet
3. Retained Earnings Statement
4. Statement of Cash Flow
© 2008 TAB Boards International, Inc
Operating Statement (EBIT) Sales:
Service 402,000 Machines 923,000TOTAL SALES 1,325,000
Cost of sales: Purchases (COG) 330,000 Direct Labor 352,000
TOTAL COST OF GOODS 582,000
GROSS PROFIT 743,000
© 2008 TAB Boards International, Inc
Operating Statement (EBIT) Operating expenses:
Advertising 109,000 Commissions 55,000 depreciation 34,000 Insurance 38,000 Repairs & maintenance 192,000 Salaries 145,000 FICA tax 29,000 Unemployment tax 12,000 Legal & accounting 26,000 Miscellaneous 7,000TOTAL OPERATING EXPENSE 647,000
OPERATING PROFIT 96,000
© 2008 TAB Boards International, Inc
Operating Statement (EBIT)
Other income: (Not from operations) Interest 8,000
TOTAL OTHER INCOME 8,000
NET PROFIT 104,000Common shares outstanding 100,000Earnings per share 1.04
© 2008 TAB Boards International, Inc
Balance Sheet
AssetsCurrent assets
Cash in bank 40,000 Notes receivable 40,000 Accounts receivable 330,000 Inventory 360,000 Prepaid expenses 9,000
TOTAL CURRENT ASSETS 779,000
© 2008 TAB Boards International, Inc
Balance Sheet
AssetsFixed assets
Land (no depreciation) 50,000 Buildings 315,000 Fixture & equipment 310,000 Capitalized equipment lease 20,000 Accumulated depreciation (197,000)
TOTAL FIXED ASSETS 498,000
© 2008 TAB Boards International, Inc
Balance Sheet
AssetsIntangible assets
Franchisee fee 10,000 Goodwill 0
TOTAL INTANGIABLE ASSETS 10,000
TOTAL ASSETS 1,287,000
© 2008 TAB Boards International, Inc
Balance SheetLiabilitiesCurrent liabilities
Notes payable 10,000 Accounts payable 207,000 Accrued salaries and expenses 113,000 Current portion under capital lease 2,000
TOTAL CURRENT LIABLITIES 332,000
© 2008 TAB Boards International, Inc
Balance SheetLiabilitiesLong-term liabilities
Obligation under capital lease 7,000 (less current portion) Mortgage payable 21,000
TOTAL LONG-TERM LIABLITIES 28,000
TOTAL LIABILITIES360,000
© 2008 TAB Boards International, Inc
Balance SheetEquity
Issued capital stock outstanding 353,000
100,000 shares Retained earnings 654,000
TOTAL EQUITY (Net Worth) 1,007,000
TOTAL LIABILITIES AND EQUITY 1,367,000
© 2008 TAB Boards International, Inc
Retained Earnings Statement
Last Year This Year
Balance Jan 1 515,000 496,000
Prior period adj. 35,000 94,000
Adj. Balance Jan 1 550,000 590,000
Net profit for year 102,000 104,000
Total 652,000 694,000
Less Distributions 0 40,000
Balance Dec 31 652,000 654,000
Less appropriations: 116,000 0
Unrestricted balance Dec 31 496,000 654,000
© 2008 TAB Boards International, Inc
Statement of Cash FlowNet Income (per operating statement) 104,000
Adj. to reconcile net income to net cashProvided by operating activities
Decrease in inventory 10,000Increase in accumulated depreciation 34,000Increase in accounts payable 58,000Increase in accrued salaries and expenses 6,000Increase due to prior year adjustment 94,000
Decrease in notes payable (2,000)Increase in accounts receivable (50,000)Increase in notes receivable (10,000)Total Adjustments 140,000Net cash provided by operating activities 244,000
Cash paid for purchase of equipment (92,000)Cash paid for purchase of equipment (110,000)Net cash provided by investing activities (198,00)Increase in mortgage payable 4,000Cash paid for distribution (40,000)Net cash provided by financing activities (36,000)Net increase in cash 10,000Cash at start of the year 30,000Cash at year end 40,000
© 2008 TAB Boards International, Inc
Key Financial Ratios: Liquidity
Current Ratiocurrent assets 859current liabilities 389 = 2.22.0 + good below 1.0 poor
Quick Ratiocash + receivables + cash equivalent 490total current liabilities 368 = 1.331.2-1.3 good 1.0 or less poor
© 2008 TAB Boards International, Inc
Key Financial Ratios: Efficiency
Accounts receivable days(Receivable 330 sales ) * 365 1325 * 365 = 91 daysThe lower the days the better.
Accounts payable days (Accounts payable 127 COGS) *365 582 * 365 = 80 days
The lower the better as it shows how company is meeting its obligations.
© 2008 TAB Boards International, Inc
Key Financial Ratios: Profitability
Return on assetsNet Income 104 Total assets 1287 = 8.0%This number should grow. The higher the better.
Return on equityNet income 104Total equity 1007 = 10.3%The higher the better.
© 2008 TAB Boards International, Inc
Key Financial Ratios: ProfitabilityGross profit margin
Gross profit 643 Sales 1325 = 48.5%The higher is normally better.
Net profit marginAdj. net profit 104 Sales 1325 = 7.8%This is the most important statistic. The higher the better.
© 2008 TAB Boards International, Inc
Key Financial Ratios: Leverage
Debt to equityTotal Liabilities 360 Total Equity 129 = 2.8Creditors like a lower ratio for reduced risk investor and they like a higher ratio for financial leverage.
Debt leverage ratioTotal Liabilities 360 EBITDA 138 = 2.6The ability to repay your debt obligations from an operating cash flow (EBITDA).
© 2008 TAB Boards International, Inc
How Can I Help You Better Understand
Financial Statements?