Entrepreneurship

Entrepreneurship

Chapter 8 Using Financial Statements to

Guide a Business

Entrepreneurship, 2nd EditionMariotti and Glackin with NFTE

© 2010 Pearson Education, Upper Saddle River, NJ 07458.

All Rights Reserved.2

Entrepreneurs Use Financial Statements Income statement Cash flow statement Balance sheet

Data for the financial statements comes from the accounting journal.

The statements show the health of the business at a glance.




Income Statement: Scorecard for the Entrepreneur Prepared monthly and at end of fiscal year

Also called “profit and loss statement”

Shows whether or not business is making a profit

Profit is entrepreneur’s reward for adding value to scarce resources




Eight Parts of the Income Statement1. Revenue2. Cost of Goods Sold (COGS)3. Other Variable Costs4. Contribution Margin (Gross Profit)5. Fixed Operating Costs (USAIIRD)6. Pre-Tax Profit7. Taxes8. Net Profit/(Loss)




Income Statement




A Simple Income Statement




Income Statement for a More Complex Business




Return on Investment (ROI) Entrepreneurs “invest” time, energy, or

money into something because they expect a “return” of money or satisfaction.

Return on investment (ROI) measures return as a percentage of the original investment.

Net Profit/Investment x 100 = ROI%What is made over what is paid, times 100.




To Calculate ROI for a Business, You Need 3 Things:1. Net Profit: found on bottom line of

the income statement. 2. Investment: all money used to start

the business (Start-Up Investment) plus additional money invested later.

3. The period of time for which you are calculating ROI (typically one month or one year).




Income Statement Ratios Express each line of the income

statement as a percentage by dividing sales into it and multiplying by 100.

This makes it easy to see how each item is affecting the business’s profit.

Return on Sales (ROS) = Net Income/Sales

Operating Ratio =Fixed Operating Costs/Sales




Same Size Analysis: Used to Compare Income Statements




The Balance Sheet A “point-in-time” statement Shows how a business is financed Prepared at end of fiscal year 3 items

Assets = things a company owns that are worth money

Liabilities = debts a company must pay, including unpaid bills

Owner’s Equity (OE) = Assets-Liabilities, also called “net worth”




Balance Sheet




Short and Long-Term Assets

Assets are all items worth money owned by the business:

Current assets—cash or items that can be quickly turned into cash

Accounts receivables Inventory Supplies

Long-term assets—items that would take the business more than one year to use

Equipment Furniture Machinery Real estate




Current and Long-Term LiabilitiesLiabilities are all debts owed by the business. Current liabilities—debts that must be paid

within one year Bills Lines of credit Short-term loans

Long-term liabilities—debts that will be paid over more than one year Bank loans Mortgages




The Balance Sheet Equation

Assets – Liabilities = Owner’s Equityor

Assets = Owner’s Equity – Liabilities

Owner’s Equity is also called: Net worth Capital




Assets Must Equal (“Balance”) Liabilities + O.E.

If an item was financed with debt, the loan is a liability.

If an item was purchased with the owner’s money, it was financed with equity.

Liabilities and owner’s equity pay for all items owned by the business (assets).




Analyzing a Balance Sheet The balance sheet shows how a business is financed. Investors use ratios and “same-size” analysis to

analyze a balance sheet.




“Same-Size” Balance Sheet Analysis




Quick and Current RatiosQuick Ratio: Cash + marketable securities

Current Liabilities

Should always be greater than 1 Shows whether there is enough cash to cover all bills

within 24 hours

Current Ratio: Current AssetsCurrent Liabilities

Should always be greater than 1 Shows whether a business could sell some assets to pay

off its debts




Debt RatiosDebt ratios show at a glance how much of the company is

financed with debt and how much with equity.

Debt-to-Equity Ratio: Debt/EquityExample: ratio of 1 means for every $1 of debt the company owns $1 of assets.

Debt Ratio: Debt/AssetsExample: ratio of 0.5 means company is in debt for 50% of its assets.

Entrepreneurs like to have a fairly high debt ratio, because it means they are financing the business not with their own money but with credit from creditors and suppliers.




Operating Efficiency Ratios Collection Period Ratio:

Average accounts receivable (Balance Sheet) Average daily sales (Income Statement)

Receivable Turnover Ratio:

Total Sales (Income Statement) Average Accounts Receivables (Balance Sheet)

Inventory Turnover Ratio:

Cost of Goods Sold (Income Statement) Average Inventory (Balance Sheet)

= # of days

= # of times

= # of times

Entrepreneurship

Documents

pearson education

upper saddle river

income statement ratiosexpress

return of money

business startup investment

investment roi measures

investment roientrepreneurs

additional money