FM - Financial Records [LESSON]

Financial Records

Income Statement

An income statement is the summary of the business's income and expenses and is used to calculate Net Profit.

What is the difference between gross and net?

Gross refers to the total and Net refers to the part of the total that really matters.

  • Gross sales: total of all sales for a given period of time
  • Net sales: gross sales less returns and allowances
  • Gross profit: the difference between revenue and the cost of goods sold
  • Net profit: the bottom line, the profit after paying all taxes and expenses.

Take some time to click and view the interactive income statement below.

  • Net Income- The net income is the amount you have left when you subtract your expenses from your gross profit.  
  • Net Profit - The bottom line. The profit you have after paying all taxes, and expenses.

Greatest Computer Company is in the business of making computers. Greatest takes in sales or revenues when a customer orders computers, ships them to the customer, and the customer pays Greatest. Companies usually allow their customer 30 days to pay up on any money owed.

Greatest has expenses. It has to pay employees, utilities, and more. Buildings or equipment bought by the company are used over a number of years. A building might last the company 10-20 years or more. Accounting rules allow the company to take a portion of the expense every year. This is known as depreciation. The cost of the building or equipment is matched to when it is used to create sales.

The Balance Sheet

A balance sheet is the summary of a business's assets, liabilities, and owner's equity.

Take some time to view the interactive balance sheet.

Assets are what the company uses to operate the business. It can include inventory to sell and buildings to house the operations. Liabilities along with equity are how it is used to finance its operations. The balance sheet measures financial health of a business.

Income Statement Activity

Now that you have had a chance to learn about an income statement, try to put the categories in the correct place on the income statement.

Balance Sheet Activity

Now that you have had a chance to learn about a balance sheet, try to put the categories in the correct place on the balance sheet.

Cash Flow Statement

A cash flow statement is a monthly plan that shows when you anticipate cash coming into the business and when you expect to pay out cash.

Cash flow looks at three components by which cash enters and leaves a company:

  • Operations - Changes made in cash, accounts receivable, depreciation, inventory, and accounts payable.
  • Investing - Changes in equipment, assets or investments.
  • Financing - Changes in debt, loans or dividends.

Take a look at this Cash Flow Statement sample:

Cash Flow statement that shows the cash flow for FY ended December 31, 2003 equal $1,522,000.

You can see that the cash flow for Greatest Computer Company for FY 2013 is $1,522,000. Most of the positive cash flow is from operations, which is a good sign for investors. Purchasing new equipment shows that the company has cash to invest in growth. The amount of cash in the bank, $1,522,000 will easily cover the notes payable and future loans.

[CC BY 4.0] UNLESS OTHERWISE NOTED | IMAGES: LICENSED AND USED ACCORDING TO TERMS OF SUBSCRIPTION