Developing
Financial
Statements
Good Spirit Regional
Economic Development
Authority Inc.
THE BALANCE SHEET
The balance sheet is a snapshot of the company's financial standing at an instant in time. The balance sheet shows the company's financial position, providing information on what the company owns (its assets), what it owes (its liabilities), and the value of the business to its stockholders (the shareholders equity). The concept behind the balance sheet is very simple. In order to acquire assets, a firm must pay for them with either debt (liabilities) or with the owners' capital (shareholders' equity). Therefore, the following equation must hold true:
Assets=Liabilities + Equity
Total Liabilities $30,000.00
Equity
$50,000.00
Total Assets $80,000.00
Figures used to compile the balance sheet are taken fro the pervious and current balance sheet as well as the current income statement. The income statement is usually attached to the balance sheet. As a reminder, the top of the page fill in the legal name of the business, the type of statement and the day, month and year.
For a Balance Sheet Forecast include the following:
Assets - List anything of value that is owned or legally due to the business. Total assets include all net values. These are the amounts derived when you subtract depreciation and amortization from the original costs of acquiring the assets.
Current Assets - Current assets are those assets of a company that area reasonably expected to be realized in cash, sold, or consumed during the normal operating cycle of the business (usually one year). Such assets include cash, accounts receivable and money due usually within one year, short-term investments, government bonds, inventories, and prepaid expenses.
Cash - List cash and resources that can be converted into cash within 12 months of the date of the balance sheet (or during one established cycle of operation). Include money on hand and demand deposits in the bank, eg., checking accounts and regular savings accounts.
Accounts Receivable- the amounts due from customers in payment for merchandise or services
Inventory- includes raw materials on hand, work in progress and all finished goods, either manufactured or purchased for resale.
Short-term Investments- Also called temporary investments or marketable securities, these include interest, or dividened-yielding holdings expected to be converted into cash within a year. List stocks and bonds, certificates of deposit and time-deposit savings accounts at either their cost or market value, whichever is less.
Prepaid Expenses- Goods, benefits or services a business buys or rents in advance. Examples are office supplies, insurance protection and floor space.
Fixed Assets- This is typically anything that you count as an asset of the business but not something that you are likely to sell as part of your daily business. For instance, include vans if you use them for delivery rather than trying to sell them or machines that you use for the business. Fixed assets may be leased. Depending on the leasing arrangements, both the value and the liability of the leased property may need to be listed on the balance sheet. List original purchase price without allowances for the market value.
Land
Buildings
Machinery and Equipment
Furniture and Fixtures
Vehicles
Depreciation - This refers to the gradual loss in value of equipment and other tangible assets over the course of its useful life. Accountants use depreciation to allocate the initial purchase price of a long-term asset to all the periods for which the asset will be used.
Liabilities- A loan, expense, or any other form of claim on the assets of an entity that must be paid or otherwise honored by that entity.
Current Liabilities- Lists anything that you owe that is payable within 12 months or within one cycle of operation. Typically they include the following:
Accounts Payable- amounts owed to suppliers for goods and services purchased in connection with business operations.
Short-term Notes Payable- The balance of the principal due to pay off shirt-term debt for borrowed funds. Also includes the current amount due from total balance on notes whose terms exceed 12 months.
Taxes Payable- Amounts estimated by an accountant to have been incurred during the accounting period, such as income taxes.
Accrued Payroll- Salaries and wages currently owing.
Long-Term Liabilities- Those debts that are not due for a relatively long period of time, usually more than a year or one business cycle.
Long-term Notes Payable- Notes, contracts payments or mortgage payments due over a period exceeding 12 months or one cycle of operation. They are listed by outstanding balance less the current position due.
Mortgages Payable- This is the balance of a mortgage that extends out beyond the current year For example, you may have paid off three years of a fifteen-year mortgage note, of which the remaining eleven years, not counting the current year, are considered long-term.
Equity- Any money that is invested in the business, for example your savings, if you used those to set up the business initially. In a proprietorship or partnership, equity is each owner's original investment plus any earnings after withdrawals. Shareholders' equity generally reflects the amount of capital the owners invested plus any profits that the company generates reflects the amount of capital the owners invested plus any profits that the company generates that are subsequently reinvested in the company. This reinvested income is called Retained Earnings. It is figured out on the Income Statement.
EXAMPLE OF A BALANCE SHEET
Below you will see an example of a balance sheet. The most important lesson to learn in viewing this example is that the basic balance sheet equation holds true.
Assets=Liabilities + Equity
The following balance sheet is arranged vertically starting with assets and then proceeding to detail liabilities and equity. Note that the balance sheet gives a snapshot of the assets, liabilities and equity for a given day. In our case, that is December 31, 2002.
Pete's Potato and Pasta Inc.
Balance Sheet Ending December 31st, 2002
ASSETS
Current Assets
Cash and Cash Equivalents
$10,000
35,000
25,000
$70,000
Plant and machinery
$20,000
$12,000
$8,000
$2,000
$88,000
Liabilities and Equity
Liabilities
Accounts payable
$20,000
$5,000
$40,000
Pete's Equity
$40,000
Total Equity
$48,000
$88,000
THE INCOME STATEMENT
A company's Income Statement is a record of its earnings or losses for a given period. It shows all of the money a company earned (revenues) and all of the money a company spent (expenses) during this period. It also accounts for the effects of some basic accounting principles such as depreciation.
In an Income Statement Forecast include the following:
Gross sales- Gross sales are the total revenue generated from the company's products or services before returns and allowances are deducted. An estimation of gross sales in the total number of units of products or services you realistically expect to sell each month in each department at the prices you expect to get.
Net Sales- It is the total revenue generated from the sale of all the company's products or services minus an allowance for returns, rebates, etc.
Cost of Goods Sold- This term refers to the amount the company spends to make the products it sells. Cost of goods sold includes the money the company spends to buy the raw materials needed to produce its products. The money it spends on manufacturing its products, and labor costs. The key to calculating your cost of goods sold is that you do not overlook any costs that you have incurred. Calculate cost of goods sold of all products and services used to determine total net sales. Where inventory is involved, do not overlook transportation costs. Also include any direct labor.
Gross Profit- Also called gross margin, gross profit is the difference from all the revenue the company earns from the sales of its products minus the cost of what it took to produce them.
Net Sales-Cost of Goods Sold=Gross Profit
Gross Profit Margin- The gross profit margin is expressed as a percentage of total sales (revenues). It is calculated by dividing gross profits by total net sales.
Expenses- These are the daily costs incurred in running and maintaining a business.
Advertising- Include desired sales volume and classified directory advertising expenses
Automobile- This is used to allocate cost if a personal car is used for business. Parking is also included.
Depreciation- Amortization of capital assets. This is the allocation of cost for long-term assets over a period of time.
Dues, Licenses- Any licenses or dues that are paid so that the business may operate.
Insurance- Fire or liability on property or products. Include workers' compensation.
Interest- Interest paid on outstanding loans.
Legal and Professional Fees- Outside professional services.
Office Supplies- Services and items purchased for use in the business.
Payroll Expenses- Include paid vacations, sick leave, health insurance, unemployment insurance and social security taxes.
Rent, Repair and Maintenance- List only real estate used in business. For regular maintenance and repair, including periodic large expenditures such as painting.
Salaries- Pay to management and executives
Utilities and Phone- Water, heat, light, phone, etc.
Wages-Employees- Base pay plus overtime.
Earnings Before Interest and Taxes (EBIT)- This is the sum of operating and non-operating income. It is typically referred to as "other income" and "extraordinary income (or loss)." As its name indicates, it is a firm's income excluding interest expenses and income tax expenses. EBIT is calculated as follows;
EBIT=Revenue-Expenses (or Subtract total expenses from gross profit)
Taxes- These include inventory and sales tax, excise tax, real estate tax, etc.
Net Income- The Net Income is the proverbial bottom line. It measures the amount of profit a company makes after all of its income and all of its expenses. Net Income-Earnings Before Interest and Taxes-Interest Expense-Income Taxes Interest Expense refers to the amount of interest a company as paid to its debtors in the current year. Meanwhile, income Taxes are federal and provincial taxes based upon the amount of income a company generates.
Retained Earnings- This is the amount of money that a company keeps for future use or investment. Another way to look at it is as the earnings left over after dividends are paid out. Generally, a company has a set policy regarding the amount of dividends it will pay out every year. For example, a company may have a policy that states that 70% of net earnings become retained earnings. Calculation of retained Earnings:
Retained Earnings=Net Earnings-Dividends
Dividends are cash payments made to the owners or stockholders of the company. A profitable year allows them to make such payments, although there generally are no obligations to make dividend payments.
EXAMPLE OF AN INCOME STATEMENT
The income statement shows revenues and expenditures for a specific period, usually the fiscal year. Income statements differ by how much information they provide and the style in which they provide the information.
Here is an example of a hypothetical income statement, with expenditures in parenthesis.
THE CASH FLOW STATEMENT
The Cash Flow Statement provides information to allow one to assess the enterprise's ability to generate positive future net cash flows, to meet its obligations and to pay dividends and satisfy needs for external financing. It also assesses the reasons for differences between net income and associated cash receipts & payments, and the effects on an enterprise's financial position of both its cash and non-cash investing and financing transactions. It is important to remember that the Cash Flow Statement only deals with cash paid and received.
For a Cash Flow Statement Forecast include the following:
Cash Inflow- Any cash received by the business
Cash from Sales- All cash sales. Omit credit sales unless cash is actually received
Accounts Receivable Collected- Amount to be expected paid from all credit accounts
Personal Investment- Any cash that the owner of the business invests in the enterprise.
Sales of Assets- Any assets sold during the accounting period.
Loans- Loan money received from the borrowing of funds.
Cash Outflow-Any cash paid by the business
Cost of Goods Sold: Purchases- The cost of any materials purchased to make products the company sells.
Rent, Repair and Maintenance- List cost of rent, repair and maintenance paid.
Wages-Employees- Base plus pay overtime (if any) paid to employees.
Utilities and Phone- Water, phone, heat, light and/or power paid.
Insurance, Taxes and Licenses- The cost of applicable taxes, licenses and insurance coverage on business property and products. Eg. Fire, liability, workman's compensation, etc.
Advertising- Amount to be spent to maintain sales volume (include telephone book Yellow Page cost).
Legal and Professional- Cost of outside services, including, for example, bookkeeping, accounting, etc.
Office Expenses- Cost of items purchased for use in the business (not for resale).
Salaries- Pay to management and executives.
Interest- Interest paid on loans outstanding.
Payroll Expenses- This includes taxes and benefits paid. Eg. Paid vacations, paid sick leave, health insurance, unemployment insurance, etc.
Bank Service Charges- Any services charged by the bank.
Capital Purchases- Any capital (long-term) assets purchased.
Loan Repayments- Include payment on all loans, including vehicle and equipment purchases on time payment.
EXAMPLE OF A CASH FLOW STATEMENT
The Cash Flow Statement is divided into three categories: operating, investing and financing activities. It provides a picture of cash, going both in and out of business. Here is an example of a hypothetical Statement of Cash Flows.