Balance sheets must always obey the underlying

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Unformatted text preview: nd credit the way it was paid (as in the checking balance or cash) or not paid (as in Accounts Payable). • An increase in an asset is always a debit. An increase in a liability is always a credit. • An increase in capital (for example, a new investment) is always a credit. A new investment is a credit to capital and a debit to the checking account. Three Main Statements Most financial analysis, including the financials in a standard business plan, revolves around three main statements. Two of them, the Income Statement and Balance Sheet, put to use the basic financial building blocks from the previous section. The third, the Cash Flow, brings the other two forward from accounting semi-fiction to the real world of actual money. Pro Formas Elsewhere in this book we discuss the huge difference between planning and accounting. With the three main financial statements, specifically, financial analysts use the term pro forma to describe projected statements, projections, and predictions. An Income Statement, for example, is about past results. A pro-forma Income Statement is a projected income statement. The Income Statement The Income Statement is also called Profit and Loss. People often refer to the bottom line as profits, the bottom line of the Income Statement. It has a very standard form. It shows Sales first, then Cost of Sales (or COGS, or Cost of Goods Sold, or Direct Costs, which are essentially the same thing). Then it subtracts Costs from Sales to calculate Gross Margin (which is defined as Sales less Cost of Sales). Then it shows Operating Expenses, usually (but not always) subtracting Operating Expenses from CHAPTER 14: ABOUT BUSINESS NUMBERS 14.5 Gross Margin to Show EBIT (Earnings Before Interest and Taxes). Then it subtracts Interest and Taxes to show Profit. Sales – Cost of Sales (or COGS, Cost of Goods Sold, or Direct Costs) = Gross Margin Gross margin – Expenses = Profits Notice that the Income Statement involves only four of the seven...
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