Module 5: How to Know How Much My Business is Making, Income Statement, Statement of Cashflow, Balance Sheet, Money, Financially Sound, Financial Forecasting Flashcards
Income Statement/Profit and Loss Statement
- A financial report showing the amount of profits or losses from a firm’s operations over a given time period.
- The income statement answers the question, “How profitable is
the business?” - This statement reports sales (revenue), cost of producing or acquiring the goods or services sold by the company, operating expenses, interest expense, and tax payments
- Allows business owner to consider how decisions affect the
company’s profits
Income Equation
Sales (revenue) – Expenses = Profits (income)
Cost of Goods Sold
- Part of Income Statement
- The cost of producing or acquiring goods or service to be sold by a firm.
Gross Profit
- Part of Income Statement
- Sales less the cost of goods sold.
Operating Expenses
- Part of Income Statement
- Costs related to marketing and selling a firm’s product or service, general and administrative expenses, and depreciation
Operating Profits
- Part of Income Statement
- Gross profits less operating expenses.
Interest Expense
- Part of Income Statement
- The cost of borrowed money
Profits Before Taxes/ Taxable Income
- Part of Income Statement
- Operating profits less interest
expense.
Net Profits
- Part of Income Statement
- Earnings that may be distributed to the owners or reinvested in the company.
Depreciation Expense
- Part of Income Statement
- The cost of a firm’s building and
equipment, allocated over the asset’s useful life.
Profit Margins
- Part of Income Statement
- Profits as a percentage of sales.
Dividends
- Part of Income Statement
- A distribution of a firm’s profits to the owners.
Statement of Cash Flows
- A financial report showing a firm’s sources of cash as well as its uses of cash.
Accrual-Basis Accounting
An accounting method of
recording profits when earned and expenses when incurred,
whether the profits have been received in cash or the expense paid
Cash-Basis Accounting
An accounting method of recording profits when cash is received and recording expenses when they are paid
Profits based on an accrual accounting system will differ from
the firm’s cash flows.
a) Sales reported in an income statement include both case
sales and credit sales; total sales do not correspond to the
actual case collected.
b) Some inventory purchases are financed by credit, so
inventory purchases do not exactly equal cash spent for
inventory.
c) Depreciation expense shown in the income statement is a
noncash expense.
Cash Flow Activities
- Operating, investing, and financing activities that result in cash inflows or outflows.
- Includes:
- Generating cash flows from day-to-day business operations
(operating activities) - Buying or selling fixed assets (investing activities)
- Financing the business (financing activities)
Liquidity
The degree to which a firm has cash available to meet maturing debt obligations.
Current Ratio
A measure of a company’s relative liquidity, determined by dividing current assets by current liabilities.
Return on Assets
A measure of a firm’s profitability relative to the amount of its assets, determined by dividing operating profits by total assets.
Operating Profit Margin
A measure of how well a firm is
controlling its cost of goods sold and operating expenses
relative to sales, determined by dividing operating profits by
sales.
Total Asset Turnover
A measure of how efficiently a firm is using its assets to generate sales, calculated by dividing sales
by total assets.
Debt Ratio
A measure of what percentage of a firm’s assets is financed by debt, determined by dividing total debt by total assets.
Return on Equity
A measure of the rate of return that owners receive on their equity investment, calculated by dividing net profits by owners’ equity.
Pro Forma Financial Statements
Statements that project a firm’s financial performance and
condition, including a firm’s projected profits, assets and
financing requirements, and cash flows
Five Drivers of a Firm’s Profits
- Amount of sales
- Cost of goods sold
- Operating expenses
- Interest expense
- Taxes
Working Capital or Current Assets
Cash, accounts receivable, and inventory required in day-to-day operations.
Net Working Capital
- A measure of a company’s liquidity, equal to current assets less current liabilities.
- Tendency in small firms to underestimate the amount of
capital the business requires (undercapitalizing)
Percentage of Sales Technique
A method of forecasting asset requirements using a ratio of assets to sales.
Current Ratio
Measure of a company’s relative liquidity, that compares a firm’s current assets to its current liabilities on a relative basis.
Debt Ratio
Measure of the fraction of a firm’s assets that are financed by debt, determined by dividing total debt by total assets.
Spontaneous Debt Financing
Short-term debts, such as
accounts payable, that automatically increase in proportion to a firm’s sales.
Cash Budget
A listing of cash receipts and cash
disbursements, usually for a relatively short time period, such
as a week or a month.
