Balance Sheets, Income Statements, Cash Flow by acslater

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									              Balance Sheets, Income Statements, & Cash Flow
                 Figuring out where the money really goes!

The Balance Sheet

 Balance sheets tell you “What you own and what you owe”
 Some Definitions Again:
    Assets = material and intangible items that have value
    Liabilities = what the business owners to creditors or owner
    Net Worth = Shareholders equity
 Net Worth = Assets – Liabilities
 Assets = Liabilities + Net Worth (Owner’s Equity)

Assets
 The Balance Sheet does not show profits of (loses)
 Short term needs should be very liquid
 Put money you don’t need quickly in something like a T-Bill or CD
 Should Accounts Receivable be understated?
 Fixed Assets are used over and over in generating income
 Your accountant will help you with depreciation

Intangibles
 Slogans (You’re in Good Hands…)
 Logos (IBM or Dell)
 Customer Good Will
 Product Recognition (What about that polo player on my shirt)
 Airport Slots: US Airways at DCA
 Manufacturing Delivery: Getting moved up for delivery

Liabilities
 Short Term Borrowing
    Credit Line
    Floor planning
    Just 60 – 90 days
 Advanced sales
 Accruals:
    employees
    Government
        IRS
        SS


                       A Typical Small GA Balance Sheet
   Assets (Current - $410,150)
      Cash
      Accounts Receivable
      Prepaid
       Airplane Inventory
       Parts

   Assets (Fixed) - $116,000
      Shop Equipment
      Office Equipment
      Parts
      Facilities improvement




   Liabilities - $269,200
     Trade Accounts
     Notes on AC
     Other Payables
     Accruals

   Equity - $256,950
     Investor’s Contribution
     Surplus

 Question: Does the business have enough current assets to pay debts without
    dipping into our fixed assets?
 If the current ratio is too low, a business could
       Convert non-current assets into current
       Put some profits back into the business
       Pay a low dividend to investors

                                       Ratios

   Quick Ratio (a measure of liquidity)
   Quick Ratio = Cash + Securities + Receivables/Total Current Liabilities
   Leverage Ratio (Debt/Worth Ratio)
   Debt/Worth Ratio = Total Liabilities/Net Worth
   Total Liabilities = $269,200
   Net Worth = $256,950

 Debt/Worth Ratio = $269,200/$256,950 = 1.04
 Higher is bad as you are possibly over-extended which makes it harder to
    obtain loans

Ratio Computations

 Current Ratio = Current Assets/Current Liabilities
 Current Assets = $410,150
    Current Liabilities = $269,200
    Net Worth = $256,950
 Current Ratio = $410,150/$269,200 = 1.52
 2:1 is generally accepted as good; 1:1 is minimum

                              The Income Statement

 Known as the Statement of Consolidated Operations or a Profit & Loss
    Statement (P&L Statement)
 The Balance Sheet shows fundamental soundness of the company, the
    Income Statement shows various activity
 Operating Revenues: The revenues your company gets for doing the business
    it does or what is your core business
 Operating Expenses: The expenses incurred in doing what you do

 Other Expenses: Bond interest, long-term debt, etc.
 A company may choose to enter these other expenses as non-operating
    income as well as expenses
 A good way to think of non-operating items is they result from sources other
    than the company’s core business enterprises

Income Statement Ratios

   Gross Profit Margin

 Gross Profit = Income - Cost of Goods
 Operating Income = Operating Revenues - Operating Expenses
 Gross Profit = $2,872,751 - $2,559,220 = $331,531
 Gross Profit Margin = $331,531/$2,872,751 = 11.5%
 Percentage of sales variable to pay overhead expenses of the company

 Net Profit Margin

 Net Profit before taxes = $305,140
 Gross Income = $2,924,217
 Net Profit Margin Ratio = Net Profit before taxes/Gross Income
 NPMR = $305,140/$2,924,217 = 10.4%
MANAGEMENT RATIOS
 Return on Assets (ROA) =       Net Profit Before Taxes/ Total assets
 Total Assets = $3,256,122
 ROA =       $305,140/$3,256,122 = 9.37%
 Return on Investment (ROI) = Net Profit Before Taxes/Net Worth
 Net Worth = $1,427,318
 ROI = $305,140/$1,427,318 = 21.3%

Cash Flow
 Looking at categories that changed over a specific period
 Five Main Categories
      Cash and Equivalents – Year Start
      Cash from Operations
      Cash from Investing
      Cash from Financing
      Cash and Equivalents – Year End

 You should look for changes in percentages

10/24/08

								
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