Transcript • Basic Financial Statements for Business Control • Financial statements allow mgers know the firm’s performance in reaching its financial goals of.

• Basic Financial Statements for Business Control
• Financial statements allow mgers know the firm’s
performance in reaching its financial goals of profitability &
healthy financial conditions.
• There are two main financial statements.
• 1. Balance Sheet:It summarizes the financial condition of
the business at a point in time. Its purpose is estimate net
worth or owner's equity by valuing assets & liabilities
• 2. Profit & loss or Income Statement: It summarizes those
financial transactions that affected revenue & expenses over
a period of time. The purpose of an income statement is to
provide an estimate of net farm income or profit.
• Note: While intended for different purposes, there is a key
relationship, or connection, btwn the 2 financial statements
cos most transactions affect both balance sheet & income
statement.
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• The Balance Sheet and Its Analysis
Objectives are
1. To discuss the purpose of a balance sheet
2. To illustrate the format & structure of a balance
sheet
3. To outline the problems & procedures for valuing
assets
4. To show differences btwn cost & mkt basis
balance sheet
5. To define owner's equity or net worth & show its
importance
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• Purpose And Use Of A Balance Sheet'
A balance sheet is an organization of everything "owned" &
"owes' by a business or individual at a given point in time.
Asset: Anything of value owned by a business or individual
is called an asset.
Liability: Any debt or other financial obligation owed to
someone else is referred to as a liability.
Thus, a balance sheet lists assets & liabilities & a difference
or balance being an estimate of net worth or owner's equity.
Net Worth or Owner's Equity: Is the difference btwn total
assets & total liabilities. The "balance" in balance sheet is
the requirement that the ledger be in balance through the
basic accounting equation of
Assets = liabilities + owner's equity
This allows finding owner's equity once assets & liabilities
are known:
Owner's equity = assets - liabilities
• Analysis & Comparisons of Financial Conditions: Balance
sheets are used to compare and analyze financial conditions
of firms of one period to another. Thus it can be completed
any time during an accounting period. But most of them are
prepared at the end of an accounting period, usually on
December 31 for most firms.
• This procedure allows a single balance sheet to be both an
end of the year for one accounting period and a beginning of
the year statement for the next accounting period. of the
year statement for the next accounting period.
• Measure Financial Position of a Firm at a Point in Time: Is
done primarily through the use of 2 concepts.
• 1. Solvency:Measures firm’s liabilities relative to amount of
owner's equity invested in the firm. It indicates the ability to
pay off all financial debts or liabilities if all assets were sold
– i.e. assets are greater than liabilities. If assets are not
greater than liabilities, the firm is insolvent or bankrupt.
• 2. Liquidity:Measures ability of the firm to meet financial
obligations as they come due without disrupting the normal
operations of the business.
• It also measures ability to generate needed cash & at the
time it is needed. These cash requirements & possible
sources of cash are generally measured only over the next
accounting period, making liquidity a short-run concept.
• Balance Sheet Format
• A BS shows assets at top & liabilities below assets
• Current assets
xxx
• Non-current assets
xxx
• Total assets
xxx
• Current liabilities
xxx
• Non-current liabilities xxx
• Total liabilities
xxx
• Owner Equity
xxx
• Total liabilities & Owners Equity xxx
• Balance Sheet AgBiz Corporation December 31, 19
• Current assets: Cash
• Accounts receivable
• Inventories
• Total current assets
• Fixed assets: Land
• Buildings and equipment
• Less allowance for depreciation
• Total fixed assets
– Other investments: Cash value of life insurance
• Investment in stock in other firms
• Investment in subsidiary
– Total other investments
• Total assets
• Current liabilities:
Accounts & notes payable
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• Accrued taxes payable
• Installments due this year on long-term debt
Total current liabilities
Long-term liabilities:Long-term notes payable
Total liabilities
Owners' equity: Capital stock
390,500
Retained earnings, January 1
177,200
Net income for the year
42,300
Retained earnings, December 31 219,500
Total owners' equity
Total liabilities and owners' equity
$ 17,000
30,000
127,000
$ 174,000
250,000
660,000
170,000
740,000
6,600
24,400
75,000
106,000
1,020,000
$53,000
1,750
35,200
89,950
320,050
410,000
610,000
$1,020,000
• Assets: An asset has value for two reasons.
• 1st , it can be sold to generate cash or,
• 2nd , it can be used to produce other goods that in turn can
be sold for cash at some future time.
• Liquid Assets: Goods that have already been produced, e.g.
grain can be sold quickly & easily without disrupting future
pdn activities
• Illiquid or Less Liquid Assets: Assets like land, machinery,
breeding livestock, are used to produce other pdts but are
difficult to sell quickly & easily at their full market value
for cash income as it will affect the firm’s ability to produce
future income.
• Tangible & Intangible Assets: Tangible assets include
inventory or equipments, intangible assets include patents
or “goodwill” associated with firm’s past performance.
• 1. Current Assets:Are more liquid assets, will either be used
up or sold within the next yr as part of normal business
activities. Cash on hand, checking/savings account balances
are current assets & are the most liquid of all assets. Others
include marketable stocks & bonds, accounts receivable, &
feed inventories, grain, & feeder livestock (held primarily
for sale & not for breeding)
• The level of current assets measures firm's ability to pay its
bills in the coming accounting period.
• Cash. Cash is considered a current asset since it can be used
immediately.
• Accounts Receivable. Are debts owed to the firm from sales
made on credit that are expected to be paid/received during
coming accounting period (i.e a year or less).
• Inventories. Are goods expected to be sold during coming
business year. They include finished goods ready for sale,
goods in process, such as growing plants or grain in storage
that will be made into feed.
• Non-current or Fixed Assets:Include buildings, eqpt,
land, & breeding livestock. These assets provide
benefits to the firm for a period greater than one
accounting period & their value diminishes as they
wear or depreciate (except land).
• They are recorded at their acquisition cost less
depreciation taken or plus appreciation.
• Other Investments. Includes investments made
outside the normal transactions of the firm e.g. cash
value of life insurance a firm maintains on some
employees, stock investments in other firms. Assets
are grouped this way to show which are invested in
the firm's primary business & which pertain to other
ventures.
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• Liabilities and Owners' Equity
This section of balance sheet shows there are two
groups of people who can make claims against the
assets of the business- creditors & owners (or
stockholders).
Creditors 1st: Are legally entitled to the first claim;
Owners 2nd: The balance that remains is owners'
equity.
Total claims of creditors & owners must equal the
total value of assets. Hence, Assets = liabilities +
owners' equity
If Liabilities > Assets, owners' equity = -ve, & the
firm will be insolvent, & it could file for bankruptcy.
• Liabilities:A liability is an obligation or debt owed to
someone else. It represents an outsider's claim against one
or more of the business assets. They are classified as
current or long-term.
• Current Liabilities: These are financial obligations that will
become due and payable within the accounting period &
will thus require cash be available in these amounts within
the next year –e.g. accounts payable, principal & interest on
long-term debt that is due within the next accounting period,
taxes payable etc.
• Non-current or Long-term Liabilities: These include all
obligations that do not have to be paid in full within the next
year – e.g. long-term notes & contracts on land, buildings &
eqpt, less principal & interest due within the accounting
period. i.e. any principal due within the next year is shown
as current liability, & remaining balance on the debt is listed
as a non-current liability.
• Owners' equity or net worth: Represents money left for
owner of the business shld the assets be sold & all liabilities
paid as of the date of the balance sheet. Owners’ equity can
be found by subtracting total liabilities from total assets & is
thus the "balancing" amount, which causes total assets to
exactly equal total liabilities plus owners’ equity. It’s the
owner’s current investment or equity in the firm.
• Changes In Owner's Equity:
– Using Profits to Purchase Assets: Using assets in pdn provides
profits & when the profit is used to purchase additional assets or to
reduce liabilities the owner’s equity changes.
– Gifts or Sale of Assets: Owner's equity will also change if there is
a change in an asset's value, a gift or inheritance is received, or an
asset is sold for more or less than its balance sheet value.
– Assets value appreciation: Changes in asset values due to inflation
or disinflation affect equity if assets are valued at mkt value
– If owner puts into or withdraws capital from the firm, or when the
business shows a profit or loss
• Profit & Loss or Income or Operating Statement
• Its a summary of revenue & expenses for a given
accounting period.
• Purpose: It measures the difference btwn revenue &
expenses. If revenue exceeds expenses there is a
profit, & if expenses are greater than revenue there
is a loss.
• Thus it answers the question: Did the farm or ranch
business have a profit or loss last year & how large
was it?
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• Income or P&L Statement Format
In very condensed form the structure is
Total Revenue
Less Cost of Goods sold
Beginning Inventory
xxx
Plus Goods purchased
xxx
Cost of Goods available for sale
xxx
Less Ending Inventory
xxx
Total cost of goods sold
Gross Profit or Margin
Less Total Operating Expenses
Income or Profit from Operations before taxes
Plus or minus gain/loss on sale of capital assets
Less income taxes
Equals net farm income
xxx
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xxx
• Profit/Loss Statement AgBiz Corpn for Yr Ending Dec 31,
• Revenue from sales
$1,465,000
• Less: Cost of goods sold
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Inventory, January 1
$ 151,000
Plus: Goods purchased
1,105,000
Cost of goods available for sale 1,256,000
Less: Inventory, Dec. 31
127,000
• Total cost of goods sold
• Gross margin
• Less: Operating expenses
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Salaries and wages
Office expenses
Selling and promotion
Utilities and fuel
Rent
Depreciation
1,129,000
336,000
140,000
3,400
72,000
44,600
5,000
20,000
Total operating expenses
Income before taxes
Allowances for income taxes
Net income (to retained earnings)
285,000
51,000
8,700
$ 42,300
• Revenue: Is the 1st item on the P&L statement. It refers to
goods sold or services provided in cash or on credit (i.e.
amount received or to be received – accounts receivables).
• Less Cost of Goods Sold: It’s the 2nd on the P&L statement.
It represents the direct costs to the firm to goods purchased
or manufacture that were sold to generate the revenue.
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Beginning inventory
Plus Goods purchased
Goods available for sale
Less Ending inventory
Cost of goods sold
$100
+ 300
400
- 50
$350
• Gross Margin or Profit: Its the subtraction of cost of goods
sold from revenue. It shows income that remains to cover
the expenses of selling the pdt & administering the business.
• Operating Expenses/Overhead: It’s the costs of operating &
administering the business. It includes cash & non-cash
(payable) expenses.
– Cash Expenses:Include salaries, rent, utilities, repairs etc.
– Non-cash Expenses: Include depreciation, accounts payable,
accrued interest & other accrued expenses. There is also an
adjustment for prepaid expenses – i.e. cash expenses are adjusted
for accounts payable & prepaid expenses
• Subtracting operating expenses from the gross margin figure
gives the profit for the period.
• Net Income:Is the "bottom line“. It’s the amount by which
revenue exceeds expenses (i.e. profit) plus any gain or loss
on the sale of capital assets less taxes. Its the profits after
income taxes have been paid. It is then reported on the
balance sheet as the change in retained earnings.