FINANCIAL STATEMENTS AND BUSINESS CALCULATIONS

Document Sample
FINANCIAL STATEMENTS AND BUSINESS CALCULATIONS Powered By Docstoc
					                                INCOME STATEMENT

                                       Instructions

The Income State ment summarizes your actual income and expenses for a specified
period, usually your ―fiscal year‖. When expenses are deducted from revenues, your Net
Income is determined. This Income Statement is formatted to allow you to calculate both
Net Income from Fishing and Net Income (all Sources).

The fishing portion shows all revenues and all expenses related to your fishing operation,
including depreciation of capital equipment, and contains information needed to complete
federal tax form Schedule C ―Profit and Loss From Business.‖

The Income Statement is also a basic financial statement required for loan applications. It
is important to be able to track how your fishing enterprise is doing on its own, but when
you go to a financial institution for a loan they want to know how you are doing overall
when determining whether to extend credit.

Start by specifying the period covered by the statement. In the green-outlined ―User Input
Field‖ next to ―Period of ______‖ enter the period covered by the Income Statement. For
most fishermen this will be the calendar year. So, if your Income Statement is for 2007,
enter January 1 - December 31, 2007.

We begin with the fishing section of the Income Statement. The Fishing Income section
is formatted to account for items typical to a commercial fishing operation, the foremost
being Fish Sales. If you do not have income in a particular category, just leave it blank.

Another common source of income for fishermen is Vessel / Equipment Lease Income,
which could include chartering your vessel to another fisherman or oil spill response
income.

When a vessel or piece of capital equipment is sold, only the net gain from the sale is
considered for tax purposes and only net gain should be shown on the Income Statement
under Gain on Sale of Vessel or Equipment. The same is true for Gain on Sale of
Permits or Quota Shares.

The worksheet also provides extra lines for Other income sources. These are unlocked
User Input Fields that you can label as needed. You might want to leave one as ―Other‖
to serve as a catch all for a summarized amount for miscellaneous small income items.

The Variable Fishing Expenses section deals with the operating expenses found in most
fishing operations. Enter the summarized data for each category as indicated. Now do the
same with Fixed Fishing Expenses like insurance, moorage fees, interest payments, and
depreciation, which are relatively constant regardless of the amount of time spent fishing.
As with the Fishing Income section, the worksheet provides extra lines for Other fixed or
variable expenses that are unlocked User Input Fields that you can label as needed.

Depreciation and amortization deductions and the gain or loss on the sale of assets are
included in your income tax calculation. The Income Statement is prepared, in part, for
income tax purposes that is why depreciation deductions appear there.

   Note: Depreciation is an accounting convention that reflects wear, tear, and
   obsolescence of capital equipment, allowing the owner to subtract this loss in
   value as a business expense. A “useful life” is determined for each piece of
   equipment and the cost of the equipment is divided over that lifetime, giving a
   depreciation schedule. Each year, a portion of the cost is deducted as a business
   expense. This is an important consideration for tax calculations of which your
   Income Statement is a vital part. Depreciation schedules can be complicated so
   getting good accounting advice is a must. Amortization works the same as
   depreciation, but applies to intangible assets such as permits and IFQs purchased
   after August 10, 1993, which are generally deductible on a “straight line” basis
   over 15 years.

Having now entered all of you Income and Expense data, your Net Income from Fishing
is automatically calculated at the bottom of page 1 of the Income Statement.

Now we move to your other, non- fishing sources of income and non- fishing expenses.
Under Additional Income list all your non-fishing income sources, like wages or salary
from off-season employment. You should list your gross income from these sources, not
your ―take home‖. Next list Interest or Investment Dividend Income from your savings
and investments, followed by Gain on Sale of Investments. If you are an Alaska resident,
don’t forget your Permanent Fund dividend. We have provided five more lines to list any
other sources of personal income you might have, such as income from rental property, or
the like.

Personal & Living Expenses come next, and include:

Food, Clothing and Entertainment
Utilities (water, sewer, electric, fuel oil, telephone, etc.)
Insuranc e (house, car, life, medical, disability, etc.)
Medical Expens es (not covered by insurance)
Child Support / Alimony
Interest Portion of Mortgage & Other Loan Payments
Rent
Taxes (income tax, property tax, etc.)
Charitable Contributions
Other Purchases
Other Payments




                                                      2
Once you have completed entering your Additional Income sources and your Personal &
Living Expenses, the Income Statement spreadsheet automatically combines this
information with the data on your fishing operation to calculate your Net Income (all
sources). Simply put, this is the sum of all your income sources, minus all of your
expenses.


                             CASH FLOW STATEMENT

                                       Instructions

This worksheet records the much same information as the Income Statement, but with
two important differences. First, and most obvious, it is formatted to record information
on a month by month basis, giving you a picture of your inflow and outflow of cash as
incurred through the entire year. This is important because it can help highlight problems
in balancing your income with out going payments over time. This is the essence of a
cash flow statement. As the old saying goes ―You may look good on paper, but if you
can’t pay your bills, you’re broke.‖ This is especially important for fishermen, whose
earnings periods often do not line up well with periods of high expenses. If you have big
maintenance costs in the late winter and spring, getting ready for the season, but don’t
have much cash coming in until mid to late summer, you can be in serious financial
trouble even though your long-term prospects are good.

The Cash Flow Statement also differs from the Income Statement in how it treats certain
cash inflows and outflows. You will notice that the income portion of the statement is
titled ―Fishing & Other Operating Income‖ instead of just ―Fishing Income‖. This is
because of the addition of a category called Operating Loan Proceeds, which does not
appear on the standard Income Statement. This is for short-term, less than one-year loans
used to bridge the period between when you incur expenses and when you get income.

Also, on the Cash Flow Statement the entire proceeds of sales of vessels, gear, permits or
other business assets is shown as income, not just the net gain on such sales.

The Variable Fishing Expenses categories are the same as on the Income Statement
except for being recorded on a monthly basis. However, under Fixed Fishing Expenses
there are important changes.

On a Cash Flow Statement the expenses of Depreciation and Amortization are eliminated
because they do not require cash to be paid out in the current period. Depreciation is real
- and is an allowed deduction under the tax code to help offset the wears and tear, and
obsolescence of equipment over time. Likewise, the IRS allows you to ―write-off‖
purchases of permits or quota over time. But, these expenses do not have immediate cash
consequences, so are not included in cash flow calculation.

Loans are also treated differently. On an Income Statement only the interest portion of a
loan payment is treated as an expense. That is because the principal portion of payments



                                             3
is offset by an equal increase in your equity. However, on a Cash Flow Sta tement both
the principal and interest portion of loan payments (and loan pay-offs from sales of
equipment or permits) are recorded as an expense because the principal payment
represents an outflow of cash even though it is offset by an increase in equity.

The result is your Net Cash Flow from Fishing, recorded each month and totaled for the
year. Simply put, this is the net amount of actual cash generated – plus or minus. Right
below that is a line titled Cumulative Cash Balance from Fishing which is just a
running total of monthly figures.

Next, proceed to enter your Additional Cash sources like wages, interest and investment
income, Permanent Fund dividend, etc. just like on the Income Statement, but on a month
by month basis.

The same goes for your Personal & Living Costs, but note that under Mortgage & Other
Loan Payments you should include the entire amount of such payments – both principal
and interest. The idea here is just the same as with your boat loan - the principal payment
represents an outflow of cash even though it is offset by an increase in equity.

The end result is your Net Cash Flow (all sources) and Cumulative Cash Flow (all
sources) which integrate you fishing and non-fishing incomes and expenses.

Net Cash Flow it is often a more meaningful figure than Net Income to a sole proprietor,
to a lender, or to a potential buyer of your business. That’s because it more accurately
reflects ability to pay bills, meet living expenses, and to grow the business through
purchase of additional assets or taking on new ventures.

       STATEMENT OF ASSETS AND LIABILITIES (BALANCE SHEET)

                                        Instructions

The State ment of Assets and Liabilities, commonly known as the Balance Sheet,
summarizes what an individual or business owns and what it owes. The difference
between total assets and total liabilities is Net Worth.

Along with your Income Statement, the Balance Sheet is a routine part of every loan
application. Lenders review a potential borrower’s list of assets and liabilities to help
determine the ability to repay a loan.

This workbook contains a standard Balance Sheet, which summarizes your assets and
liabilities positions, and two additional worksheets – Assets Details and Liabilities
Details. Use the Details worksheets to provide more in-depth listing of your assets and
liabilities, and bring the calculated sub-totals for each category forward to the main
Balance Sheet.




                                              4
Typically, the Balance Sheet is divided into current and long-term assets, and current and
long-term liabilities. Subtracting current liabilities from current assets gives an indication
of short-term cash position and ability to pay existing or upcoming bills and loan
payments. Subtracting long-term liabilities from long-term assets indicates the ability to
repay a loan in the event that a borrower runs into financial difficulties and must liquidate
assets to pay off creditors. We have added sub-categories to separate fishing assets from
non- fishing assets.

Curre nt Assets are cash or other assets which can be converted (liquidated) to cash in a
short period at little or no expense. Commonly, they are thought of as those available
over the next 12 month period. Because they can be easily liquidated, current assets are
often referred to as ―liquid assets.‖ Included are checking and savings accounts,
certificates of deposit, stocks, bonds, and other salable securities, uncollected income
from the sale of fishery products to a cannery or other buyer, money due from the sale of
equipment, and loans to friends or relatives—assuming they are collectible. Other such
assets include prepaid insurance or rent, and the cash value of an ordinary life insurance
policy. Money in a Capital Construction Fund account should not be treated as a
current asset. Even though it may be readily available in theory, taking money out of a
CCF prematurely or for other than approved purposes can result in substantial tax
consequences and or penalties. For these reasons it is prudent to treat CCFs as Long-
Term Assets.

Also included are pre-paid expenses like insurance, storage space leases, and moorage.
You should list only the remaining value of such pre-paid expenses. For example, if six
months of vessel insurance coverage remains at the time you prepare a statement of assets
and liabilities, enter the remaining six months value of the insurance as a current asset.

Note that the Balance Sheet has Purchase Price and Fair Market Value columns for
current and long-term assets. In the Current Assets most of these values will be the same.
So enter the values in the User Input Fields under Current Value, and those same values
will be automatically entered under the Purchase Price column. The exception is
Marketable Stocks & Securities. In this case you must list both the original purchase
price and the current value of stocks, bonds, and other marketable investments whose
value changes with time.

Long-Term Assets are commonly major investments. Some are depreciable such as
vessels and equipment, fishing gear, warehouses, and vehicles. Long-term assets which
are not depreciable include land, stock in family or closely held corporations, or
mortgages or contracts held on property being purchased from you. Fishing permits and
IFQs (if purchased after August 10, 1993) are long-term assets that can be amortized, that
is they can be ―written off‖ for tax purposes over a 15- year period, much like capital
assets can be depreciated over time. The characteristic that distinguishes long-term assets
from current assets is that long-term assets are not intended to be purchased and sold
within one year, nor do they wear out in that time period. With Long-Term Assets you
must list both the original Purchase Price and the current Fair Market Value.




                                              5
Curre nt Liabilities include bills and notes, loan payments, and taxes due within one year
or one accounting period. Notes are short-term loans from a bank or other creditors.
Long-term loans stretch over more than one year and are considered long-term liabilities.
However, the payments on long-term loans which are due during the current are
considered current liabilities. Include both the principal and interest on notes and long-
term loan payments due. For the sake of simplicity, do not list principal and interest
separately. Taxes payable within one year or one accounting period may include back
taxes owed plus estimated taxes payable on net income shown on the income statement.
Unpaid property tax assessments, employee withholding taxes, and social security taxes
are also current liabilities.

Long-Term Liabilities are the remaining balances on mortgages and loans that are
scheduled for repayment over a period of more than one year. This is net of the principal
payments that come due within one year and fall into the category of current liabilities.
Note: Do not include anticipated interest payments. Because you have the option to pay
off a loan at any time, interest is not a liability until it has actually been accrued.

Totals from the completed Assets and Liabilities sections are displayed in the bottom
section of the Balance Sheet and Net Worth is automatically calculated. Net Worth is
simply Total Assets minus Total Liabilities. It reflects what would remain after selling all
assets and paying all debts. Note that two values for Net Worth are calculated. By one
method of calculation, all assets are valued at original Purchase Price, also known as
―book value‖. By the other method, long-term and certain short-term assets (Marketable
Stocks & Securities for example) are valued at current Fair Market Value. Bankers are
most interested in Fair Market Value as that represents what can be reasonably viewed as
security for loans. For tax purposes you typically look at Purchase Price, or what is
known as cost basis, in order to compute gain or loss on the sale of an asset.




                                             6