Quicken Income Statement

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					Financial Statements
      John C. Kelly
Discussion Question

 How do you measure your
personal financial condition?
       Net Worth
Cash + investments + property


  Bills + loans + mortgages


       Your Net Worth
     Discussion Question

How much of your net worth is usable?
         Usable Net Worth
           That which is liquid
That which can be easily converted to cash

             Cash in the bank
          Investments you can sell
          Amount you can borrow
            Financial Statements
► Sources  and Uses of Funds – What money do you
  need to start your business and where will you get
► Balance Sheet – Snapshot of financial condition
► Income Statement – Financial performance over
  an interval of time. Also called profit and loss or
► Cash Flow Statement – Similar to P&L but includes
  cash expenditures which are not expenses buying
  capital equipment and loan principle payments.
          The Balance Sheet
►A   snapshot of the financial condition of the
  company at a moment in time.
► You can think of it as a statement of what
  would be left if all the assets were sold and
  all the bills paid. An individual would call
  this a net worth statement.

       Net worth = Asset - Liabilities
        Balance Sheet Format
         ASSETS               LIABILITIES
► Cash in Bank          ► Accounts payable
► Accounts Receivable   ► Accrued payroll
► Prepaid Expenses      ► Bank loans
► Inventory             ► Mortgages
► Equipment             ► Credit Card Balances
► Real Estate
                               Net Worth

 Assets = Liabilities + Net Worth
      Discussion Question

What does your balance sheet look like
  the day you start your business?
          Initial Balance Sheet
         ASSETS                 LIABILITIES

► Cash            $1000   ► Amount   Owed      $0

                                NET WORTH

                          ► Equity          $1000
    Balance Sheet Terminology
►Net Worth =
►Shareholder’s Equity =
►Owner’s Equity =
►Equity =
►Book Value

       All names for the same thing. Think of it like the equity
       in your house, which is the market value minus the
       mortgage amount. It is money you could have if you
       sold your house. Of course, you would get a little less
       because of the cost of selling.
          Income Statement
► Measures  financial performance over time.
  Balance sheets are snapshots. Income
  statements are interval oriented.
► Measures profit over an interval of time.

  Profit = Revenue – Expenses
    Income Statement Format
  Cost of Goods Sold
Gross Profit
  Selling Expenses
  General & Administrative
Net Profit
  Provision for Income Tax
 Income Statement Terminology
► Income,   revenue, profit, and earnings are
  all frequently used interchangeable with
  conflicting meanings.
► The words net and gross are some times
  used to clarify meaning.
► I say

       Revenue = Sales = Gross Income
        Profit = Earnings = Net Income
      Discussion Question

What happens when you make a sale but
  don’t receive the money right away?
    Accrual Vs Cash Accounting
► Cash accounting, like you do in your
  personal life, says an expense occurs when
  the cash is spent, and income occurs when
  the cash is received.
► Accrual accounting assigns expenses and
  income to the period in which they occur,
  whether or not cash is received or spent.

     See Pub 583 and Pub538 Accounting Periods
Golden Rule for
   Small Biz
 Use cash accounting
  as long as possible
   Discussion Question

 How should you account for the
purchase of a car or a large piece
 of equipment like a pizza oven?
Depreciation is classic example of accrual
accounting where the cost of an asset is spread
over the expected life of the asset. For example, a
car is not expensed in the year it is purchased,
rather it is expensed over a period of years. If the
depreciation period is five years. Only 1/5 of the
cash spent will show up as an expense in the year
the money is spent. Therefore, the change in cash
on hand shown in the balance sheet will not jive
with the profit shown on the income statement.
The cash flow statement corrects for this.
    Multiple Sets of Books
 Depending Upon the Audience
► Managers  – focus on cash flow
► Investors – meet SEC requirements
► Tax Collectors – meet IRS requirements

  Perfectly legal, perfectly confusing
         SEC Financial Reporting
► 10-K Annual financial report
► 10-Q Quarterly financial report
► 8-K Unscheduled report of change in
  financial condition

              SEC Edgar Financial Database
      Discussion Question

 How would you use the numbers in the
financial statements to evaluate the health
               of a business?
         Performance Ratios
► Revenue   per employee
► Average sale amount
► Number of sales/deals per month
► Survival ratio
► Profit Margin
► Return on Equity (ROE)
► Inventory Turnover
► P/E Ratio
             Tax Reporting
► Small Business Guide – Pub 583
► Sole Proprietorship – Schedule C
► Corporation Return – 1120
► S-Corp Return – 1120S
► Partnership and LLC - 1065
  Basic Guidelines to Get Started
► Maintain  a separate checking account
► Pay your taxes
► Use a payroll service
► Start with basic Quicken
► Advance to QuickBooks

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