Balance Sheets

A balance sheet is a snapshot of a business’ financial condition at a specific moment in time, usually at the close of an accounting period. A balance sheet comprises assets, liabilities, and owners’ or stockholders’ equity. Assets and liabilities are divided into short- and long-term obligations including cash accounts such as checking, money market, or government securities. At any given time, assets must equal liabilities plus owners’ equity. An asset is anything the business owns that has monetary value. Liabilities are the claims of creditors against the assets of the business.

1. Assets
Assets are subdivided into current and long-term assets to reflect the ease of liquidating each asset. Cash, for obvious reasons, is considered the most liquid of all assets. Long-term assets, such as real estate or machinery, are less likely to sell overnight or have the capability of being quickly converted into a current asset such as cash.

2. Current assets
Current assets are any assets that can be easily converted into cash within one calendar year. Examples of current assets would be checking or money market accounts, accounts receivable, and notes receivable that are due within one year’s time.

• Cash
Money available immediately, such as in checking accounts, is the most liquid of all short-term assets.

• Accounts receivables
This is money owed to the business for purchases made by customers, suppliers, and other vendors.

• Notes receivables
Notes receivables that are due within one year are current assets. Notes that cannot be collected on within one year should be considered long-term assets.

3. Fixed assets
Fixed assets include land, buildings, machinery, and vehicles that are used in connection with the business.

• Land
Land is considered a fixed asset but, unlike other fixed assets, is not depreciated, because land is considered an asset that never wears out.

• Buildings
Buildings are categorized as fixed assets and are depreciated over time.

• Office equipment
This includes office equipment such as copiers, fax machines, printers, and computers used in your business.

• Machinery
This figure represents machines and equipment used in your plant to produce your product. Examples of machinery might include lathes, conveyor belts, or a printing press.

• Vehicles
This would include any vehicles used in your business.

• Total fixed assets
This is the total dollar value of all fixed assets in your business, less any accumulated depreciation.

4. Total assets
This figure represents the total dollar value of both the short-term and long-term assets of your business.

5. Liabilities and owners’ equity
This includes all debts and obligations owed by the business to outside creditors, vendors, or banks that are payable within one year, plus the owners’ equity. Often, this side of the balance sheet is simply referred to as “Liabilities.”

• Accounts payable
This is comprised of all short-term obligations owed by your business to creditors, suppliers, and other vendors. Accounts payable can include supplies and materials acquired on credit.

• Notes payable
This represents money owed on a short-term collection cycle of one year or less. It may include bank notes, mortgage obligations, or vehicle payments.

• Accrued payroll and withholding
This includes any earned wages or withholdings that are owed to or for employees but have not yet been paid.

6. Total current liabilities
This is the sum total of all current liabilities owed to creditors that must be paid within a one-year time frame.

7.  Long-term liabilities
These are any debts or obligations owed by the business that are due more than one year out from the current date.

• Mortgage note payable
This is the balance of a mortgage that extends out beyond the current year. For example, you may have paid off three years of a fifteen-year mortgage note, of which the remaining eleven years, not counting the current year, are considered long-term.

8.   Owners’ equity
Sometimes this is referred to as stockholders’ equity. Owners’ equity is made up of the initial investment in the business as well as any retained earnings that are reinvested in the business.

• Common stock
This is stock issued as part of the initial or later-stage investment in the business.

• Retained earnings
These are earnings reinvested in the business after the deduction of any distributions to shareholders, such as dividend payments.

9. Total liabilities and owners’ equity
This comprises all debts and monies that are owed to outside creditors, vendors, or banks and the remaining monies that are owed to shareholders, including retained earnings reinvested in the business.

Income Statements

An income statement, otherwise known as a profit and loss statement, is a summary of a company’s profit or loss during any one given period of time, such as a month, three months, or one year. The income statement records all revenues for a business during this given period, as well as the operating expenses for the business.

1. Sales
The sales figure represents the amount of revenue generated by the business. The amount recorded here is the total sales, less any product returns or sales discounts.

2. Cost of goods sold
This number represents the costs directly associated with making or acquiring your products. Costs include materials purchased from outside suppliers used in the manufacture of your product, as well as any internal expenses directly expended in the manufacturing process.

• Gross profit
Gross profit is derived by subtracting the cost of goods sold from net sales. It does not include any operating expenses or income taxes.

3. Operating expenses
These are the daily expenses incurred in the operation of your business. In this sample, they are divided into two categories: selling, and general and administrative expenses.

• Sales salaries
These are the salaries plus bonuses and commissions paid to your sales staff.

• Advertising
These represent all costs involved in creating and placing print or multi-media advertising.

• Other sales costs
These include any other costs associated with selling your product. They may include travel, client meals, sales meetings, equipment rental for presentations, copying, or miscellaneous printing costs.

• Office salaries
These are the salaries of full- and part-time office personnel.

• Rent
These are the fees incurred to rent or lease office or industrial space.

• Utilities
These include costs for heating, air conditioning, electricity, phone equipment rental, and phone usage used in connection with your business.

4. EBITDA

Earnings before interest, taxes, depreciation and amortization. Also known as operating cash flow, Ebitda is calculated by subtracting costs of sales and operating expenses from revenues.

• Depreciation
Depreciation is an annual expense that takes into account the loss in value of equipment used in your business. Examples of equipment that may be subject to depreciation includes copiers, computers, printers, and fax machines.

5. EBIT
Earnings before interest, taxes,., Ebit is calculated by subtracting costs of sales , operating  expenses and depreciation from revenues.

• Interest

a fixed charge for borrowing money; usually a percentage of the amount borrowed

6. EBT -  Net income before taxes
This number represents the amount of income earned by a business prior to paying income taxes..

• Taxes

This is the amount of income taxes you owe to the federal government and, if applicable, state and local government taxes.

7. Net income
This is the amount of money the business has earned after paying income taxes.

The statement of cash flow

The statement of cash flow reports the movement of cash into and out of your business in a given year.

Major Classifications of Cash Flow

Cash Flow Statements are broken down into three sections:

• Operating activities
• Investing activities
• Financing activities

Operating activities (all transactions and events that normally enter into the determination of operating income) include cash receipts from selling goods or providing services, as well as income from items such as interest and dividends. Operating activities also include your cash payments such as inventory, payroll, taxes, interest, utilities, and rent. The net amount of cash provided (or used) by operating activities is the key figure on a statement of cash flows.

Investing activities include transactions and events involving the purchase and sale of securities (excluding cash equivalents), land, buildings, equipment, and other assets not generally held for resale. It also covers the making and collecting of loans. Investing activities are not classified as operating activities because they have an indirect relationship to the central, ongoing operation of your business (usually the sale of goods or services).

All financing activities deal with the flow of cash to or from the business owners (equity financing) and creditors (debt financing). For example, cash proceeds from issuing capital stock or bonds would be classified under financing activities. Likewise, payments to repurchase stock (treasury stock) or to retire bonds and the payment of dividends are financing activities as well.