FinancefortheNon-FinancialManagerLesson1MgmtX434.10Lesson1LessonOutcomeObjectivesAttheendofthislessonyouwillbeableto:DescribethebasictypesoffinancialstatementsUnderstandthebasicsoffinancialstatementanalysisApplyHorizontalAnalysisApplyVerticalAnalysisOwner’sEquityAssets=Liabilities+Owner’sEquity+PROFITS+OwnerInvestments-OwnerWithdrawals-Expenses+Revenues

=NetIncomeRevenuesSalesofgoodsorservicestocustomers.Theyaremeasuredattheamountthebusinesschargesthecustomer.ExpensesThecostsofbusinessnecessarytoearnrevenues,includingwagestoemployees,advertising,insurance,andutilities.Revenues-Expenses=NetIncomeSeparateEntityAssumptionRequiresthatabusiness’sactivitiesberecordedandreportedseparatelyfromactivitiesofitsowners.

FinancialStatementsBalanceSheet

Thebalancesheetisalistofassets,liabilitiesandowner’sequityasofaspecificdate.IncomeStatementTheincomestatementisasummaryofrevenueandexpensesforaspecificperiodoftime.CashFlowStatement

Thecashflowstatementisthesummaryofcashreceiptsandcashpaymentsforaspecificperiodoftime.IncomeStatementHeadingNameoftheentity

Titleofthestatement

AccountingperiodRevenuesearnedfromthesale/deliveryofpizzatocustomersExpensesarecostsincurredduringtheperiodtoearnrevenueStatementofOwner’sEquityPurposeReportsthechangesinthecapitalaccountsincethebeginningoftheperiodBalanceSheetPurposeReportsatapointintime:Whatabusinessowns(assets)Whatitowestocreditors(liabilities)Whatisleftoverforthecompany’sowner(s).BASICACCOUNTINGEQUATIONAssets=Liabilities+Owner’sEquityStatementofCashFlowsPurposeSummarizeshowabusiness’soperating,investingandfinancingactivitiescauseditscashbalancetochangeoveraparticularperiodoftime.RelationshipsamongtheFinancialStatementsNetincomeflowsfromtheIncomeStatementtotheStatementofRetainedEarnings.

RelationshipsamongtheFinancialStatements

RelationshipsamongtheFinancialStatements

CashontheBalanceSheetandCashatEndofYearontheStatementofCashFlowsagree.

SummaryofFourBasicFinancialStatementsCommonSizeFinancialStatementsCommonsizeratiosareusedtocomparefinancialstatementsofdifferent-sizecompanies,orofthesamecompanyoverdifferentperiods.CommonSizeIncomeStatementThefollowingexampleincomestatementshowsboththedollaramountsandthecommonsizeratios:Revenue $100,000100%CostofGoods 60,00060%OperatingExpenses25,00025%NetIncome15,00015%CommonSizeBalanceSheetForthebalancesheet,thecommonsizepercentagesarereferencedtothetotalassets.Thefollowingsamplebalancesheetshowsboththedollaramountsandthecommonsizeratios.CommonSizeBalanceSheetAssetsCash $10,000 25% Securities $5,000 12.5%AccountsReceivable $5,000 12.5%Inventory $20,000 50%TotalAssets $40,000 100%Liabilities-CurrentLiabilities $5,000 12.5%LongTermDebt $10,000 25%TotalLiabilities $15,000 37.5%ShareholdersEquity $25,000 62.5%TotalLiabilitiesandEquity $40,000 100.0%

HorizontalAnalysis

Percentageanalysisofincreasesanddecreasesinrelateditemsincomparativefinancialstatements.

Increase(Decrease)Example: 2008

2007

Amount

%Cash $90,500$64,700$25,80039.9%Securities $75,000$60,000$15,00025.0%Inventories $98,000$99,500($1,500)(1.5%)VerticalAnalysisApercentageanalysisshowingtherelationshipofeachcomponenttothetotalwithinasinglestatement.Example

2008

2007

Amount%Amount%Sales$1,498,000100%$1,234,000100%CostofGoods1,043,00069.6%820,00068.3%OperatingExp295,00019.7%244,40020.7%Netprofit$91,0006.1%$76,500