Chapter 15 Notes

Goals

• Describe why businesses need to maintain financial records (15.1)

  • Financial records are essential for businesses because they provide an accurate picture of the company’s financial health, help track revenue and expenses, ensure compliance with legal obligations, and aid in decision-making and planning.

• Identify and discuss the purpose of several types of business financial records. (15.1) 

  • Financial records like income statements, balance sheets, and cash flow statements help monitor profitability, financial position, and liquidity.

• Describe the uses of several types of business budgets. (15.2)

  • Operating, cash flow, and capital budgets are used to control costs, manage cash, and plan for future investments.

• Discuss the reason managers prepare more than one budget estimate. (15.2)

  • Managers prepare multiple budget estimates to anticipate various scenarios and remain adaptable to changes.

• Describe the information contained in a balance sheet statement and the importance of that information to a business. (15.3)

  • A balance sheet shows assets, liabilities, and equity, providing insight into a company's financial position and stability.

• Explain how an income statement is different from a balance sheet and the value of the income statement to a business. (15.3) 

  • An income statement shows profitability over time, while a balance sheet provides a snapshot of financial health at a specific moment.

• Describe several types of financial analysis that help in the understanding of a business’s financial condition. (15.4) 

  • Ratio analysis, trend analysis, and break-even analysis help assess profitability, performance trends, and cost coverage.

• Identify where business owners and managers can turn to get help with understanding and using financial information. (15.4) 

  • Business owners can seek help from financial advisors, accountants, software tools, and financial institutions.

Chapter 15.1 

Financial Records

• Financial records - organized summaries of business’s financial information and activities

• Small-scale record systems - manual records systems, cash register information, accounting software

• Large-scale record systems - accounting software accounting departments, POS terminals, outsourcing 

  • POS - point of sale 

  • Outsourcing - hiring a company that manages other aspects in a business

Types of Financial Records

• Cash records

• Credit records

  • Accounts receivable record

  • Accounts payable record

• Depreciation records

  • Cars, or equipment that lose value over time 

• Special asset records

  • Could be investments - stocks, bonds, etc. 

• Tax and payroll records 

Chapter 15.2

Types of Budgets

• Start-up budget

• Operating budget

• Cash budget

  • Cash receipts from sale of goods or services

  • Borrowed money 

• Capital budget

  • Largest expenses a company will face 

    • Incorporates capital expenditures 

• Sales budget

  • Product or service 

    • Goals (monthly, annually, quarterly) 

Chapter 15.3 

Balance sheets

• Balance sheet - financial statement that reports a business’s assets, liabilities, and capital on a specific date

  • Assets - anything of value owned

  • Capital - value of owner’s investment after subtracting liabilities from assets 

  • Liabilities - claims against assets (debts) 

• Income statement - P&L Statement - financial statement reporting information about revenues and expenses for a specific period 

  • Revenue, Profit & Loss, Expenses 

Chapter 15.4

Using Financial Information

• Cash flow - movement of cash into and out of a business 

  • (operating, investing, financing) 

• Working capital - difference between current assets and current liabilities 

• Financial ratios - used to identify possible problems needing correction 

  • Return on sales, inventory turnover (stock turnover) , current ratio, return on investment 

Cash Flow

• Cash Receipts > Cash Payments is more optimal for a business

• Not enough cash flow can cause bankruptcy 

Sources of Financial Information 

• Accountants

• Bankers

• Consultants

• Government 

  • Small Business Administration (SBA)