04 | THE FINANCIAL ASPECT Flashcards
This refers to the expenses a business incurs before its operations.
Start-up costs
(Types of Start-up Costs)
These expenses or upfront costs occur before the business’s launch and before any revenue is generated.
Start-up Expenses
(Types of Start-up Costs)
These costs refer to the expenses incurred when acquiring long–term assets to initiate the business.
Start-up Assets
(Types of Start-up Costs)
Provide an essential assessment of a start-up company’s initial funds in its checking account during its commencement.
Cash
What are the two categories of Start-up Expenses?
One-time Expenses and On-going Expenses
Provide the examples of One-time Expenses.
- Necessary equipment like cash registers, machinery, or vehicles
- Permits and licenses, such as city, county, and state licensing
- Computer or technology equipment
- Down payment for office or store
- Initial inventory
- Initial office supplies
- Signage and office renovation
- Office or business furniture and fixtures
Provide the examples of On-going Expenses.
- Rent or mortgage payment
- Accounting services
- Taxes and legal services
- Business Insurance
- Payroll and employee benefits
- Office Supplies
- Website hosting and maintenance
- Travel expenses such as flight fees or gasoline
- Utilities like electricity, gas, water, phone, and internet
- Marketing materials
- Ongoing inventory
- Loan or credit payments
What are the valuable assets that entrepreneurs should consider investing in?
- Starting inventory
- Computers or other technological equipment
- Office equipment
- Office furniture
- Vehicles
(Capital Funding Strategies)
A person invests and manages financial instruments, such as stocks, bonds, real estate, and others, as a personal investment.
Personal investment
(Capital Funding Strategies)
It is money given to a spouse, parents, friends, or other loved ones. Also known as “patient capital”
Love money
(Capital Funding Strategies)
Investors provide private equity, and financing to small and start- up businesses that they believe have long–term growth potential.
Venture Capital
(Capital Funding Strategies)
Most common form of funding for small and medium-sized businesses.
Loans
(Capital Funding Strategies)
Typically wealthy individuals or retired executives who make direct investments in privately held small businesses.
Angels
(Capital Funding Strategies)
Future businesses and start-ups are frequently invited to share incubator spaces and technical, administrative, and logistical resources with other established businesses.
Business Incubators
(Capital Funding Strategies)
A type of fundraising that involves a business asking the general public for money, typically in exchange for equity in the business.
Crowdfunding
(Capital Funding Strategies)
Can be used for specific things and can be paid without repaying.
Grants and Subsidies
(The Four (4) Financial Statements)
Financial statement that shows a company’s revenues, expenses, and net profit over a specific period of time.
Income Statement
What are the Importance of Income Statement according to Tripathi, 2018?
- The income statement helps business owners understand their company’s financial situation and make fast and well–informed decisions about business expenses.
- An income statement gives stakeholders, shareholders, and the business owner insight into the business’s financial state.
-The income and other financial statements (balance sheet and cash flow statement) will provide the necessary financial data to calculate business taxes.
(The Four (4) Financial Statements)
A statement of owner’s equity is a financial statement that shows the changes in the owner’s equity during a specific period of time.It includes information such as the beginning and ending balance of the owner’s equity, net income or loss, additional investments made by the owner, and any withdrawals or distributions taken by the owner. (CFI, 2022).
Statement of Owner’s Equity (Retained earnings)
What are the Importance of Statement of Owner’s Equity?
- The statement of owner’s equity helps stakeholders understand how the owner’s equity has changed and what factors have contributed to those changes.
- These profits can be kept for a variety of reasons, including spending on new machinery and equipment, investing in research and development, or engaging in other activities that have the potential to propel the business forward.
- It is used to evaluate the financial health and performance of the business.
(The Four (4) Financial Statements)
Shows a company’s financial position at a specific point in time. It provides a snapshot of its assets, liabilities, and shareholders’ equity.
Balance Sheet (Statement of Financial Position)
How is a balance sheet devided?
- The assets include cash, accounts receivable, inventory, and property.
- Liabilities consist of accounts payable, loans, and other obligations.
- Shareholders’ equity represents the owner’s investment and retained earnings.
What is the Importance of Balance Sheet (Statement of Financial Position)?
- The balance sheet can show a company’s financial health at a specific time —typically at the end of a fiscal year or the end of a month.
- It shows how much money the business owes and how much assets are worth right now.
- It helps monitor the company’s performance, spot trends, and implement financial support strategies using balance sheet data.
- It can help businesses assess the ability to pay bills on time and how to use credit to finance the business.
(The Four (4) Financial Statements)
It shows how cash is generated from operating activities, investing activities, and financing activities over a specific period.
Statement of Cash Flow
What are the three (3) sections of a Cash Flow Statement?
- Operating activities - detail cash flow generated once the company delivers its regular goods or services, including revenue and expenses.
- Investing activities - include cash flow from purchasing or selling assets—physical property, such as real estate or vehicles, and non–physical property, like patents—using free cash, not debt.
- Financing activities - detail the cash flow from both debt and equity financing.
What are the Importance of Statement of Cash Flow?
- Whenever a business reviews any financial statement, it should consider it from a business perspective. Financial documents provide insight into an organization’s financial health and status.
- Cash flow statements can reveal what phase a business is in, whether it is a rapidly growing start-up or a mature and profitable company. It can also reveal whether a company is going through a transition or in a state of decline.
- Using the statement of cash flow, an investor might decide that a company with uneven cash flow is too risky to invest in, or they might decide that a company with positive cash flow is primed for growth.
- Cash flow also impacts internal decisions, such as budgeting or hiring (or firing) employees.
This refers to the resources owned or controlled by an individual, company, or organization.
Assets
What are the two (2) types of Assets?
- Current Assets - can be converted to cash within one business operation year.
- Fixed (Non-current) Assets - used to produce goods and services that have a life of more than one (1) year.
What are the examples of Current assets?
A. Cash – Physical money in the form of coins and banknotes.
B. Accounts receivable – Unpaid amount for products or services a company delivers to its customers.
C. Inventory – The stock of goods or materials that a company holds.
D. Prepaid Expense – Expenses that are paid in advance.
What are the two (2) types of Fixed (Non-current) Assets?
- Tangible Fixed Assets - include the following sample accounts: Trucks, office furniture, machinery, buildings, and land.
- Intangible Fixed Assets - include the following sample accounts: goodwill, patents, copyrights, trademarks, and franchises.
These are obligations that the law requires to be paid to another organization or individual.
Liabilities
What are the two (2) types of Liabilities?
- Current Liabilities - has to pay back within the next 12 months.
- Non-current (Long-term) Liabilities - not due for more than 12 months
Provide the examples of Current debts
- Accounts payable – Unpaid amount of products or services of the business
- Salaries and Wages – Compensation paid to employees for their work or services
- Notes payable – Written promissory note for the debt a company owes to another business
- Mortgage payable – Amount of money owed by the company for a property loan
Non–current liabilities include the following sample accounts:
- Customer Deposits – Amounts received from customers in advance for goods or services not yet provided.
- Lease Obligations – Long–term agreements with periodic payments for using property, equipment, or vehicles.
- Pension Liabilities – Obligations arising from employee retirement plans.
- Long–term Debt – Loans and borrowings with more than one (1) year of maturity.
- Warranty Liabilities – Obligations to repair or replace products with defects or issues within a specified period after the sale.
It is the sum invested in a company by its owners in addition to any earnings that are still retained.
Equity
Give the 4 sample accounts under Equity.
- Owner’s Capital – Represents the amount of money or assets that the owner has contributed to the business
- Owner’s Withdrawals – Money withdrawn by business owners for personal expenses or investments.
- Common Stocks – Represent ownership in a company.
- Retained Earnings – the portion of a company’s net income that is retained and reinvested in the business
It is a measurement of a company’s total gross activity. Service and product sales are two (2) examples.
Revenue
What are the Two (2) categories of revenue (Blakely–Gray, R. 2022)?
- Operating Revenue - income generated from selling goods or providing services directly related to the company’s main operations.
- Non-operating Revenue - money earned from a side business that has nothing to do with the company’s day–to–day operations.
Provide the 4 examples of Operating revenue.
- Sales – Income generated from the sale of goods or services
- Professional Services – Income earned from providing services to customers or clients
- Rental Income – Income earned from leasing out property or equipment
- Commission Earned – Fees earned from facilitating sales or transactions as a commission agent
What are the sample accounts of Non–operating revenue?
- Dividends – Income earned from owning stocks or shares in companies
- Investment Income – Profit gained by investors from their investment activities
- Gains or losses from foreign exchange – Changes in the value of a country’s currency compared to another currency
- Sales of assets – Money earned from selling assets such as properties or equipment
This is when an asset loses value because it is used to make money.
Expenses
What are the two (2) categories of expenses?
- Operating expense - expenses related to the company’s main activities. The business will incur these expenses from normal, day–to–day activities.
- Discretionary expense - considered nonessential spending.
What are the examples of Operating Expenses?
- Cost of Sales – Expenses directly related to producing goods or providing services
- Utilities Expense – Costs related to the consumption of various utilities, such as electricity, gas, water, and internet
- Purchases – Costs related to buying goods or services
- Freight expense – Cost incurred by a company for the transportation of goods or materials
- Advertising Expense – Cost incurred for the promotional activities of the company’s product or services
- Depreciation Expense – The gradual wear and tear, obsolescence, or decline in asset value.
- Interest Expense – Cost incurred by a company for borrowing funds
- Rent Expense – Amount paid by a business to use a property or space.
- Supplies Expense – Cost of supplies used during a given period
- Licenses Fees and Taxes – Amount of taxes a company owes to the government.
What are the examples of Discretionary expenses?
- Company travel – Costs incurred by the company for its employees’ business-related travel activities
- Investments and innovations – Costs incurred for research and development
- Employee perks – Represent the amount the company spends for rewarding employees with good performance
- Office improvements – Costs incurred for office renovations or upgrades
- Employee training – Costs related to training and development opportunities for its employees.
What is the fundamental element of the balance sheet and the primary principle of accounting?
Accounting Questions
What is the formula for Accounting Equation?
Assets = Liabilities + Owner’s Equity
What are the six (6) conclusions to having a balanced equation?
- An increase in assets has a corresponding increase in liability.
- An increase in assets has a corresponding capital increase.
- An increase in one asset has an opposite decrease in another asset.
- A decrease in assets has a corresponding decrease in liability.
- A decrease in assets has a corresponding decrease in capital.
- An increase in liability has a corresponding decrease in capital.
