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POB 4.01 Part 3 – Income Statements & Balance Sheets

POB 4.01 Part 3 – Income Statements & Balance Sheets. 4.01 Understand financial planning. . Elements of Financial Strength. Assets: what the company owns Liabilities: what the company owes Owner’s Equity: value of owner’s investment in the business

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POB 4.01 Part 3 – Income Statements & Balance Sheets

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  1. POB 4.01 Part 3 – Income Statements & Balance Sheets 4.01 Understand financial planning.

  2. Elements of Financial Strength • Assets: what the company owns • Liabilities: what the company owes • Owner’s Equity: value of owner’s investment in the business • Financial Statements: reports that sum up the performance of the business • Balance sheets • Income statements

  3. Balance Sheet • Balance Sheet: shows assets, liabilities, and owner’s equity for a specific date • Usually done every 6 months or yearly

  4. Balance Sheet Parts • Assets: anything of value owned by the business • Current: cash and items readily converted to cash (inventory, accounts receivable) • Long-Term (aka “fixed”): lifespan of more than one year (land, buildings, equipment, technology) • Liabilities: amounts owed by the business to others • Current: will be paid within 1 year (short-term loans, inventory, supplies, and inexpensive equipment) • Long-Term: debts that will continue for more than 1 year (buildings, land, expensive equipment)

  5. Income Statement • Income Statement: report of revenue, expenses and net income or loss from operations for a specific period of time • Often for a 6 month period or 1 year

  6. Income Statement Parts • Revenue: all income that is received by the business during the time period • Sources: sale of products, interest earned on investments • Expenses: all the costs incurred by the business during the time period • Ex: operations, purchase of equipment, inventory, supplies, as well as payroll and taxes • Net Income: when revenue > expenses • Net Loss: when expenses > revenue

  7. Why are financial statements important? • Compare your business performance from year-to-year • Compare your business to similar businesses to assess your ability to compete • When assets are rising you have the ability to invest in new products, buildings and equipment • When liabilities are increasing or when expenses go up while revenue goes down, the business needs to evaluate why the situation is occurring.

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