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Entrepreneurial Finance, 4th EditionBy Adelman and Marks
PRENTICE HALL©2007 by Pearson Education, Inc.Upper Saddle River, NJ 07458
3-1
Chapter 3
Financial Statements
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Entrepreneurial Finance, 4th EditionBy Adelman and Marks
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3-2
Understand how financial statements are used by businesses.
Understand the differences and similarities that exist between a personal cash flow statement and a business income statement.
Distinguish between fixed and variable expenses. Understand the changes in income statements that exist
with different forms of business.
Learning Objectives
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Entrepreneurial Finance, 4th EditionBy Adelman and Marks
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3-3
Understand the differences and similarities that exist between a personal statement of financial position and a business balance sheet.
Analyze the components of the basic accounting equation. Distinguish between assets and liabilities. Understand the relationship between fixed assets and
depreciation.
Learning Objectives (continued)
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Entrepreneurial Finance, 4th EditionBy Adelman and Marks
PRENTICE HALL©2007 by Pearson Education, Inc.Upper Saddle River, NJ 07458
3-4
Understand the significance of the statement of cash flows. Given the basic data for a company, be able to construct a
financial statement. Understand the problems that may exist with financial
statements.
Learning Objectives (continued)
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Entrepreneurial Finance, 4th EditionBy Adelman and Marks
PRENTICE HALL©2007 by Pearson Education, Inc.Upper Saddle River, NJ 07458
3-5
Financial Statement (Personal Form)
Single bank loan application form which incorporates two individual financial forms:› Statement of financial position
– Cash– Cash equivalents– Invested assets– Use assets – Liabilities– Net worth
› Personal cash flow statement– Income– Fixed expenses– Variable expenses
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3-6
NAME: SOCIAL SECURITY NO:
ADDRESS: BUSINESS PHONE: CITY, STATE, ZIP HOME PHONE:
SPOUSE NAME: SOCIAL SECURITY NO:ASSETS IN DOLLARS LIABILITIES: IN DOLLARS
CASH IN THIS BANK: CHECKING LOANS PAYABLE THIS BANK:
SAVINGS:
LOANS PAYABLE OTHER FINANCIAL
INSTITUTIONS: (SCHEDULE 6)
CASH IN OTHER FINANCIAL INSTITUTIONS:
ACCOUNTS PAYABLE OTHER FIRMS &
INDIVIDUALS: (SCHEDULE 6)CREDIT CARDS:
MARKETABLE STOCKS AND BONDS; (SCHEDULE 1) INCOME & OTHER TAXES PAYABLE:ACCOUNTS RECEIVABLE: (SCHEDULE 2) REAL ESTATE TAXES:
TOTAL CURRENT ASSETS TOTAL CURRENT LIABILITIES:NOTES OR MORTGAGES RECEIVABLE:
(SCHEDULE 3)
OTHER REAL ESTATE INDEBTEDNESS
(SCHEDULE 5):CASH SURRENDER VALUE LIFE INSURANCE:
(SCHEDULE 4)
LIFE INSURANCE LOANS:
(SCHEDULE 4)VEHICLES (YEAR & MAKE): OTHER LONG-TERM DEBTS: (DESCRIBE)
REAL ESTATE: (SCHEDULE 5)OTHER PERSONAL PROPERTY: TOTAL LIABILITIES:
TOTAL ASSETS:TOTAL ASSETS - TOTAL LIABILITIES = NET WORTH
ANNUAL INCOME: ANNUAL FIXED EXPENSES:GROSS SALARY: REAL ESTATE PAYMENTS: (SCHEDULE 3)
SPOUSE'S GROSS SALARY: RENTBONUSES & COMMISSIONS: INCOME TAXES:
INCOME FROM SECURITIES: (SCHEDULE 1) PROPERTY TAXES:RENTAL OR LEASE INCOME (SCHEDULE 3) ALIMONY, CHILD SUPPORT:
MORTGAGES OR CONTRACT INCOME (SCHEDULE 3) INSURANCE PREMIUMS:OTHER INCOME (DESCRIBE): OTHER (DESCRIBE):
TOTAL GROSS INCOME: TOTAL ANNUAL EXPENSES:LESS - TOTAL EXPENSES:
NET CASH INCOME:
Table 3 -1, Financial Statement, Personal Form
FINANCIAL STATEMENT Personal FormFIRST ANY KIND OF BANK: OFFICE:
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3-7
Personal Income Statement (Cash Flow Statement)
Income—Include all sources› Wages, tips, overtime› Interest on savings, stock dividends, etc.
Fixed expenses› Contractual, must be paid› Rent, insurance, utilities, car payments, etc.
Variable expenses› You control level of expenses (food, clothing)
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3-8
INCOME Salaries 60,000$
Interest Income 740 TOTAL INCOME $60,740
FIXED EXPENSESMortgage Payment 9,600$ Automobile Payment 5,040 Property Taxes 1,235 Insurance 4,500 Income Taxes 5,032 Savings & Investment 1,200 Personal Loan Payment 900 TOTAL FIXED EXPENSES 27,507$
VARIABLE EXPENSESFood 5,485$ Transportation 2,500 Utilities 1,800 Clothes & Personal 2,700 Recreation & Vacation 2,780 TOTAL VARIABLE EXPENSES 15,265$ TOTAL EXPENSES 42,772$
(Cash Balance at the end of the year) 17,968$
January 1, 2006 to December 31, 2006.
Table 3-2 Jones Family, Personal Income StatementThe Tom Jones Family
Personal Income Statement(Cash Flow Statement)
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3-9
Income Statement Business
Basic Format› Sales, revenues, income from doing business› Less cost of goods sold› Gross profit› Less operating expenses› Operating income› Less interest› Net income (explain)
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3-10
Gross Sales 350,642$ Less: Returns and Allowances 2,366
Net Sales 348,276$
Cost of Goods Sold 124,276
Gross Profit 224,000$
Operating Expenses:Salaries Expense 95,000$ Rent Expense 24,000Property Taxes Expense 2,500Depreciation Expense 6,000Utilities Expense 10,250Advertising Expense 9,250Insurance Expense 3,000
Total Operating Expenses 150,000
Operating Income 74,000$
Other Expenses:Interest Expense 10,000
Net Income* 64,000$
*This line on an Income Statement for a Corporation appears as Net Income before Income Taxes see Table 3-3a
The Tom Jones Company
Table 3-3 Income Statement for a Sole Proprietorship, Partnership, Limited
Income StatementJanuary 1, 2006, through December 31, 2006
Liability Company, or Subchapter S-Corporation
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3-11
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3-12
Balance Sheet (Statement of Financial
Position) Basic Accounting Equation
Individual
Sole Proprietorship
Partnership
Corporation
EquitysOwnersLiabilitieTotalssetsTotal ' A +=
EquitysPartnersLiabilitieTotalAssetsTotal '+=
EquitysrStockholdesLiabilitieTotalAssetsTotal '+=
Net Worth A += sLiabilitieTotalssetsTotal
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3-13
Balance Sheet (Statement of Financial Position) (continued)
Total assets› Current assets
– Cash, accounts receivable, inventory› Fixed assets
– Land
– Building & equipment (less accumulated depreciation)
– Net building & equipment
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3-14
Balance Sheet (Statement of Financial Position) (continued)
Total liabilities› Current liabilities
– Accounts payable, notes payable, taxes payable› Long-term liabilities (debt)
Total equity› Preferred stock› Common stock par value › Paid-in capital in excess of par (common)› Retained earnings
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3-15
AssetsCash and Cash Equivalents
Cash and Checking Account 1,900$ Savings Account 4,000
Total Cash and Cash Equivalents 5,900$
Invested AssetsStocks and Bonds 38,000 Life Insurance Cash Value 5,500
Total Invested Assets 43,500$
Use AssetsResidence 310,000 Automobiles 45,000 Furniture, clothing, jewelry, etc. 52,000
Total Use Assets 407,000$
Total Assets 456,400$
Liabilities and Net WorthLiabilities
Homeowner's Insurance 975 Credit Card Balance 4,500 Automobile Note Balance 22,400 Home Mortgage Balance 138,000
Total Liabilities 165,875$ Net Worth 290,525 Total Liabilities and Net Worth 456,400$
Table 3-4 Statement of Financial Position (Balance Sheet)
The Tom Jones FamilyStatement of Financial Position
As of December 31, 2006
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3-16
Current AssetsChecking Account 2,000$
Certificates of Deposit 50,000 Accounts Receivable 40,000
Inventory 35,000 Total Current Assets 127,000$
Fixed Assets
Land 50,000$ Buildings 250,000$
Less: Accumulated Depreciation 50,000 200,000 Equipment 50,000$
Less: Accumulated Depreciation 6,000 44,000 Total Fixed Assets 294,000$
Total Assets 421,000$
Current LiabilitiesAccounts Payable--Trade 10,000$
Notes Payable--Bank 5,000 Taxes Payable 3,000
Total Current Liabilities 18,000$
Long-Term LiabilitiesBuilding Mortgage 180,000$
Equipment Loan 30,000
Total Long-Term Liabilities 210,000$
Total Liabilities 228,000$ Owner's Equity 193,000$
Total Liabilities and Owner's Equity 421,000$
Assets
Liabilities and Owner's Equity
Table 3-5 Balance Sheet (Statement of Financial Position), Sole Proprietorship
The Tom Jones CompanyBalance Sheet
As of December 31, 2006
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3-17
Partners' Equity
Tom Jones 18,650$ Larry Smith 83,925 Kathy Moore 83,925
Total Partner's Equity 186,500$
Total Liabilities and Partners' Equity 421,000$
Table 3-6 Balance Sheet, Partnership
Tom Jones and Partners
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3-18
Current AssetsChecking Account 2,000$ Certificates of Deposit 50,000 Accounts Receivable 40,000 Inventory 35,000
Total Current Assets 127,000$
Fixes AssetsLand 50,000$ Buildings 250,000$ Less: Accumulated Depreciation 50,000 200,000 Equipment 50,000$ Less: Accumulated Depreciation 6,000 44,000
Total Fixed Assets 294,000$
Total Assets 421,000$
Current LiabilitiesAccounts Payable--Trade 16,500$ Notes Payable--Bank 5,000 Taxes Payable 14,000
Total Current Liabilities 35,500$ Long-Term Liabilities
Building Mortgage 180,000$ Equipment Loan 30,000
Total Long-Term Liabilities 210,000$
Total Liabilities 245,500$
Stockholders' EquityPreferred Stock, $5 par (10,000 Shares) 50,000$ Common Stock, $0.10 par (100,000 Shares) 10,000 Paid-in Capital in Excess of Par--Common 50,000
Total Paid-in Capital 110,000$ Retained Earnings 65,500
Total Stockholders' Equity 175,500$
Total Liabilities and Stockholder's Equity 421,000$
Assets
Liabilities and Stockholder's Equity
Table 3-7 Balance Sheet (Statement of Financial Position), CorporationThe Tom Jones Corporation
Balance SheetAs of December 31, 2006
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3-19
Current AssetsChecking Account 3,000$ Certificates of DepositAccounts Receivable 23,000 Inventory 18,000
Total Current Assets 44,000$
Fixes AssetsLand 50,000$ Buildings 100,000$ Less: Accumulated Depreciation 45,000 55,000 Equipment 50,000$ Less: Accumulated Depreciation 5,000 45,000
Total Fixed Assets 150,000$
Total Assets 194,000$
Current LiabilitiesAccounts Payable--Trade 8,000$ Notes Payable--Bank 3,500 Taxes Payable -
Total Current Liabilities 11,500$ Long-Term Liabilities
Building Mortgage 135,000$ Equipment Loan 35,000
Total Long-Term Liabilities 170,000$
Total Liabilities 181,500$
Owner's Equity 12,500$ 12,500
Total Liabilities and Stockholder's Equity 194,000$
Assets
Liabilities and Owner's Equity
Table 3-7a Balance Sheet (Statement of Financial Position), CorporationThe Tom Jones Corporation
Balance SheetAs of December 31, 2005
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3-20
Statement of Cash Flows
Statement of cash flows shows how the company’s working capital flows into and out of the business during the year.
Statement of cash flows includes:› Cash flows from operating activities is the difference between all
of the cash received by the business and all of the cash paid out by the business in conducting its day-to-day operations.
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3-21
Statement of Cash Flows (continued)
– Receipts: All cash received from sales, changes in accounts receivable, changes in inventory.
• NOTE: An increase in accounts receivable or inventory represents a negative cash flow. A reduction in receivables or inventory is a positive cash flow.
– Payments: All payments made by the company to all accounts (suppliers, employees, rent, utilities, etc.).
› Cash Flows from Investing Activities:
– Acquisition or sale of Plant Assets › Cash Flows from Financing Activities:
– Proceeds from issuance or sale of stock (preferred & common), bonds. Purchase of stock or the payment of long-term debt.
› Net increase (decrease) in cash plus the cash balance, previous year equals cash balance, current year.
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3-22
Cash flows from operating activities Net Income 53,000$
Adjustments to reconcile net income to net cash
provided by operating activies Depreciation Expense 6,000
Increase in Accounts Receivable (17,000) Increase in Inventory (17,000)
Increase in Accounts Payable 8,500 Increase in Notes Payable 1,500
Increase in Taxes Payable 14,000 (4,000)
Net Cash provided by Operating Activities 49,000$
Cash flows from investing activities: Acquisition of plant assets (150,000)
Net cash outflow from investing activities (150,000)
Cash flows from financing activities: Proceeds from issuance of preferred stock 50,000
Proceeds from issuance of common stock 60,000 Proceeds from Mortgage Payable 45,000
Payment of long-term debt (5,000) Net cash inflow from financing activities 150,000$
Net increase in cash 49,000$
Cash balance, December 31, 2005 3,000 Cash balance, December 31, 2006 52,000$
Table 3-8 Statement of Cash Flows
The Tom Jones Corporation
Statement of Cash Flows For the Year Ended December 31, 2006
Increase (Decrease) in Cash and Cash Equivalents (Amounts in thousands)
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