7.2 Slides - Financial Figures & Statements

Assets

• In business, an asset is any item of value owned by a business, often one that contributes to revenue. 

• A current asset (aka: a liquid asset) is one that can be easily converted to cash, usually in less than one year. Examples include cash itself, finished goods (inventory or “stocks”), and accounts receivable.

• A non-current asset (aka: an illiquid asset) is one that cannot be easily turned into cash, typically in more than one year. Examples include buildings,
  raw materials, or aging receivables.

• Asset can also be used to describe a person who is
  very useful to the business. “Jim is totally an asset!”

Liabilities (Review)

• In business, the term liability has two meanings …

  • (noun) a debt owed to another party, typically an amount of money; “They have many liabilities.”

  • (noun) a risk or the state of being responsible for a risk; “They have liability for the event.”

  • Liability can also be used to describe a person who is
    a potential threat or risk. “Dwight is sort of a liability.”

• Preview: In Unit 5, we addressed the second meaning. Here, we focus on the first, as used in financial docs.

Net Worth

• Net worth can be calculated for an individual or a business. It is a useful snapshot of financial health.

• For a business, net worth is called “owner’s equity,” as it is the amount the owners would receive if the business were liquidated and all debts were paid.

• Net worth (aka: owner’s equity) is simply the value of the assets owned minus the liabilities owed. [Net Worth = Total Assets - Total Liabilities]

• Net worth can be calculated and presented for an individual on a personal financial statement.

Debt-to-Equity Ratio (D/E)

• Debt-to-equity ratio (D/E) compares a business’s total liabilities with its owner’s equity. To calculate it, you first need the owner’s equity (previous Slide).

• Debt-to-equity ratio is simply the business’s total liabilities divided by the owner’s equity.

The Importance of D/E

• Debt must be repaid or refinanced, imposes interest, and can lower equity value in the event of a default.

• A business with a high debt-to-equity ratio is mostly financed through debt, and it may be unable to “pay its bills” when its liabilities are due.

• As such, a business with a high debt-to-equity ratio represents a greater risk to investors and lenders. These parties prefer a low debt-to-equity ratio.

Pro Forma Statements

• Pro forma is Latin phrase for “as a matter of form.” It means doing something in a specific format. 

• A pro forma statement is a standardized document used to analyze a business’s financial performance.

• There are three primary pro forma statements …

  • Cash Flow Statement

  • Income Statement (Profit & Loss Statement)

  • Balance Sheet (Statement of Financial Position)

• Pro forma docs utilize past financial data, but can be used to make projections of hypothetical scenarios.

Cash Flow Statement

• Cash flow (aka: cash) refers to the cash or cash equivalents available in the business to operate.

• Cash is commonly referred to as the “lifeblood” of business. It must be moving through the business (and not running out) for the business to thrive.

• If a business has a surplus of cash after paying all of its costs, it is said to have a positive cash flow.

• If it has no remaining cash (or debts) after paying all of its costs, it has a negative cash flow.

Income Statement (P&L)

• An income statement (aka: profit & loss statement or P&L), shows a business’s revenues, expenses, gains, and losses over a specific period of time.

• Key elements of an income statement include …

  • Revenue - the money received from operations

  • Cost of Goods Sold (COGS) - the direct costs for the products a business produces and sells

  • Operating Expenses (OE) - the indirect costs of the business (rent, utilities, salaries, etc.)

  • Taxes - taxes the business pays

  • Gross Profit - Revenue - COGS = gross profit

  • Net Income Before Taxes (NIBT) - not profit yet; NIBT = Revenue - COGS & Operating Expenses

  • Net Income After Taxes (NIAT) - this is profit; NIAT = Revenue - COGS - OE - taxes

Balance Sheet

• A balance sheet lists what a business owns, what it owes, and ultimately how much it is worth. 

• Key elements of a balance sheet include …

  • Assets - all the items of value owned by a business, often split into current and fixed

  • Liabilities - the amounts a business owes, often split into current and long-term

  • Owner’s Equity - the amount remaining after liabilities are subtracted from assets

  • Allowance for Doubtful Accounts - Some customers fail to pay for items bought on credit.

  • Depreciation - the loss of value in an asset over time to reflect its current worth