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CHAPTER 10 LECTURE NOTES

1

Describe the purpose and content of financial statements.

PPT 10-1

Chapter 10

Accounting Statements and

Financial Requirements

A.    Accounting statements: tools for determining financing needs

i     Ask students to identify information about a firm’s performance and financial resources by looking at the firm’s financial statements.

PPT 10-2

Chapter 10

Learning Objectives

PPT 10-3/TM 10-1

The Income Statement:

An Overview

[Acetate 10-1]

PPT 10-4

Bates & Associates’
Income Statement

1.    The income statement—this shows the profit or loss from a firm’s operations over a period of time. It provides financial information about five broad areas of business activity:

·          Revenue

·          Cost of goods sold

·          Operating expenses

·          Financing costs

·          Payment of taxes

PPT 10-5/TM 10-2

The Balance Sheet:

An Overview

[Acetate 10-2]

PPT 10-6

Bates and Associates’

Balance Sheets

2.    The balance sheet—this provides a snapshot of a firm’s financial position at a specific point in time.

                a.      Types of assets

·         Current assets are highly liquid assets.

·         Fixed assets can be capital-intensive assets.

·         Other assets can be intangible assets.

b.     Types of financing

·          Debt capital—short-term debt (e.g., accounts payable, other payables, accrued expenses, and short-term notes) is repaid within one year, while long-term debt (e.g., bank loans) is repaid over more than one year.

·          Ownership equity—initial investment plus the firm’s retained income.

PPT 10-7/TM 10-3

The Fit of the Income
Statement and the
Balance Sheet

[Acetate 10-3]

PPT 10-8/TM 10-4

A Firm’s Cash Flows

PPT 10-9

Bates and Associates’
Measurement of

Cash Flows

(Discuss how the income statement and the balance sheet complement each other.)

3.    The cash flow statement—the sources and uses of a firm’s cash flow for a given period of time.

i    Describe the difference between cash and accrual accounting.

i    A firm’s cash flows generated from operating the business must equal its financing cash flows, which are the cash flows paid to or received from the firm’s investors.

a.      A firm’s cash flows—the after-tax cash flows generated from operations less the firm’s investment in assets 

b.     Financing cash flows—the net cash flows received by the firm’s investors or (if negative) the cash flows they are investing in the firm

2

Explain how to forecast a new venture’s profitability.

PPT 10-10/TM 10-5

The Purpose of Pro Forma Financial Statements

PPT 10-11

Oakcrest Products, Inc.,
Projected Income
Statements

B.       Financial Forecasting

·         The purpose of pro forma financial statements is to answer three questions.

1.       Assessing profitability

·          Explain the factors that affect a company’s profit.

·          Discuss how to project a firm’s income.

2.             2.      Forecasting profits

3

Estimate the assets needed and the financing required for a new venture.

        3.     Estimating financial requirements

·       Ask students how accurately they estimated their college expenses. Point out                         how a small business can likewise expect to be somewhat inaccurate in its                         estimation of financial needs, although an educated guess looks better in a                         business plan than a simple guess.

·          Point out that entrepreneurs can use a double-barreled approach to estimating capital requirements:  (1) using industry standard ratios and (2) cross-checking the dollar amounts through break-even analysis and empirical investigation.

PPT 10-12/TM 10-6

Sales-Assets-Financing

Relationships

[Acetate 10-4]

                a.      Asset requirements—the key to effectively forecasting asset requirements is understanding the relationship between projected sales and needed assets.

·       Discuss the percentage-of-sales technique.

·       List the major areas of asset requirements (e.g., cash requirements, inventory requirements, accounts receivable requirements, fixed-asset requirements) and discuss how these can be estimated.

·       Ask students to identify the problems that might arise if a firm invested too                         much in fixed assets.

PPT 10-13/TM 10-7

Practical Forecasting

                b.     Types of financing

·          Five guidelines for financing a firm

·          Total asset requirements = total sources of financing = profits                            retained within the business + spontaneous sources of financing +                          external sources of financing

·          Making provisions for the entrepreneur’s personal expenses