Chapter 12 Lecture.docx - Chapter 12 Lecture Creating A...

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Chapter 12 Lecture Creating A Successful Financial Plan Introduction Entrepreneurs who fail to develop workable strategies for earning a profit from the outset eventually suffer business failure. Potential lenders and investors demand a realistic financial plan. Financial management is a process that provides entrepreneurs with relevant financial information in an easy-to-read format on a timely basis; it allows entrepreneurs to know not only how their businesses are doing financially but also why they are performing that way. Failure to collect and analyze basic financial data is a common mistake among entrepreneurs. Most accounting experts advise entrepreneurs to use one of the popular computerized accounting programs such as Quickbooks, Xero, and others to manage
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routine bookkeeping, as studies show that business owners who use them are more likely to be financially literate. Basic Financial Statements Three important financial statements assist entrepreneurs to assess the financial status of their business: the balance sheet, income statement, and statement of cash flows. The Balance Sheet. The balance sheet is a financial statement that provides a snapshot of a business’s financial position, estimating its worth on a given date; it is built on the fundamental accounting equation, Assets = Liabilities + Owner’s equity. Refer to Figure 11.1, Sam’s Appliance Shop, Balance Sheet. The first section of the balance sheet lists the company’s assets (valued at cost, not actual market value) and shows the total value of everything the business owns. It includes the following: Current assets are assets such as cash and other items to be converted into cash within one year or within the company’s normal operating cycle. Fixed assets are assets acquired for long-term use in a business. The second section shows the business’s liabilities , which are creditors’ claims against a company’s assets. This section includes the following: Current liabilities are those debts that must be paid within one year or within the normal operating cycle of a company. Long-term liabilities are liabilities that come due after one year. Owner’s equity is the value of the owner’s investment in the business. The Income Statement. The income statement (also called the profit-and-loss statement) is a financial statement that represents a moving picture of a business, comparing its expenses against its revenue over a period of time to show its net income (or loss). Refer to Figure 11-2, Sam’s Appliance Shop, Income Statement. Income includes all income from sales of goods and services revenue, as well as income from rent, investments, and interest. Other terms to understand include:
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Cost of goods sold is the total cost, including shipping, of the merchandise sold during the accounting period.
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