Barefield Financial (a)

8/8/2019 Barefield Financial (a)

1/31

Financial Statements andPerformance Analysis

Dr Leslie Mitchell

Financial Control


2/31

Importance of Financial

Management The entrepreneur must know:

What is coming in; versus what is going

out

Everything that is contained in theledger sheets

All facets of business operations Above all, dont become too

ambitious


3/31

Key Financial Statements Income or Profit & Loss Statement

Balance Sheet

Cash Flow Statement

Budget Forecast


4/31

Balance Sheet Details the financial position of a

business at a particular point in time

Assets = Liabilities + Equity

Tells the reader what the businessowns of monetary value and what the

business owes to others Personal and business assets and

liabilities are frequently reflected onthe same statement


5/31

Components of the

Balance Sheet Assets

Represents the monetary value of what

the business owns

Are normally grouped into threecategories denoting how soon theywear out or are sold

Current Less than 1 year

Intermediate 1 to 10 years

Long-term Over 10 years


6/31

Current Asset Examples Cash

Checking accounts

Savings accounts

Accountsreceivable

Inventories

Supplies

WIP investments

Equity in hedgingaccounts

Tax refunds Unused tax credits

Prepaid expenses

Payroll

Insurance

Rent


7/31

Intermediate Asset

Examples Machinery

Business vehicles

Retirement accounts

Cash value of life insurance

Household goods

Personal vehicles


8/31

Long-term Asset Examples Land

Buildings and structures

Personal residences

Non-business real estate


9/31

Components of the

Balance Sheet Liabilities

Represents the value of the debts owed

by the business Are normally grouped into three

categories denoting how soon they falldue

Current Less than 1 year

Intermediate 1 to 10 years

Long-term Over 10 years


10/31

Current Liability Examples Accounts payable

Short term notes payable

Current payments on intermediateor long term notes

Accrued expenses

Contingent tax on sale of currentassets


11/31

Intermediate Liability

Examples Loans to finance intermediate assets

less current payments

Contingent tax on sale ofintermediate assets


12/31

Long-term Liability

Examples Business and non-business

mortgages less current payments

Other long-term notes

Contingent tax on sale of long termassets


13/31

Components of the

Balance Sheet Net worth (also called net equity)

Net worth represents the difference

between the total level of assets andthe total level of liabilities

Net worth should be reported on anafter-taxbasis

If net worth is positive, the business issolvent (assets can be sold to retireliabilities). If net worth is negative, thebusiness is insolvent


14/31

Structure of the

Balance Sheet Assets

Current Assets

IntermediateAssets

Long-term Assets

Liabilities

Current Liabilities

IntermediateLiabilities

Long-termLiabilities

Net Worth


15/31

Purpose of the

Balance Sheet The balance sheet indicates the

degree to which the business is

liquid and solvent? Liquidity Can the business current

liabilities be retired if the currentassets are converted to cash?

Solvency Can the total liabilities ofthe business be retired if all assetsare converted to cash?


16/31

Income or Profit & Loss

Statement The income or profit and loss

statement summarizes the level of

revenue and expenses for thebusiness

Major components include: Revenues

Expenses

Taxes

Extraordinary Items


17/31

Revenues Business revenue can be divided

into two categories

Revenue from current operations Cash proceeds from the sale ofinventory, non-cash proceeds fromsales, patronage dividends, insurance

proceeds, non-cash inventoryadjustments

Expenses incurred in the productionprocess should be deducted fromrevenues to yield a gross profit margin


18/31

Revenues Capital gains and losses Gain or loss

realized from the sale of intermediate

or long-term assets Non-business revenue Income

derived from non-businessemployment, interest and dividend

income from non-business investments


19/31

Expenses Cash operating expenses Includes

expenses paid in cash, expenses

that have been incurred but not yetpaid (accounts payable), interestexpenses

Non-cash expenses includes

depreciation and any expenses paidfrom the last reporting period if thebusiness is reporting on a cash basis


20/31

Taxes This section includes the specific tax

liabilities incurred during the

reporting period. Only income andself-employment taxes are reportedin this section. Payroll taxes, real

estate and real property taxes, etc.,are reported under the Expensessection of the income statement


21/31

Extraordinary Items This section includes once-in-a-

lifetime events that should not be

included as a part of the firmsregular financial activities

Includes insurance payments from a

loss, agricultural disaster payments,etc.


22/31

Structure of the

Income StatementRevenues

Business Revenue

+ Gain from sale of intermediate or LT assets+ Non Business Revenues+ Non-cash revenue adjustments= Total revenue

- Cost of goods sold

= Gross profit margin


23/31

Structure of the

Income StatementGross profit margin

- Cash operating expenses

- Non-cash operating expenses= Income from business operations+(-) Gain (loss) on depreciable assets= Net business income+ Non-business revenue-Non business expenses= Income before taxes- Provisions for taxes= Net Income


24/31

Purpose of the

Income Statement Provides a summary of the revenues

and expenses associated with the

periods operating activities Provide information to complete the

business and personal income taxreturns

Shows the profitability of thebusiness for lenders and otherinterested parties


25/31

Cash Flow Statement Summarizes the levels of cash that

the business has available to meet

current obligations Generally divided into monthly or

quarterly periods to show when

excess cash is available or whenborrowing needs to occur


26/31

Components of the

Cash Flow Statement Cash available

Beginning cash balance

Cash revenues from sales and accountsreceivable

Other sources of cash

Proceeds from sale of equipment and otherassets

Non-business wages

Interest and dividend income


27/31

Components of the

Cash Flow Statement Cash required

Operating expenses

Income tax payments

Intermediate and long-term payments

Capital expenditures

Family living expenses Cash gifts and donations


28/31

Components of the

Cash Flow Statement Borrowings

New loans to finance production and

capital expenditures

Other

Short term loan payments

Savings additions and withdrawals Ending cash balance for the period


29/31

Purpose of the

Cash Flow Statement Highlights the financing

arrangements necessary to cover

cash requirements Serves as a benchmark for

budgeting activities

Analyzes the timing of financialborrowing activities


30/31

Budget Preparation Many persons assert that the budget

is simply a projection of the cash

flow statement However this is not correct

The budget must incorporate all key

financial statements Forecasting statements are also

calledpro forma statements


31/31

Key Budget Assumptions

Expected selling prices

Expected input prices

Expected input productivity Pro forma operating budget

Production costs and sales objectives

Pro forma financial budget Cash receipts and disbursements

Family living budgets

Barefield Financial (a)

Documents

Transcript of Barefield Financial (a)