Analysis Of Income Statements
    Objectives of the Course
    Criteria For Establishing Sales Departments
      Sample of Bad Accounting
           Expenses
       Sample of Poor Accounting
           Expenses
    Financial Management and Accounting
       Industry Standards
       Gross Profit Percentage Factors
       The Profit and Loss Statement (Income and Expenses)
    Information Flow to Profit and Loss Statement
    Sample Gross Profit Statement
    Sample Expense Statement
    Key Terms and Concepts
    Review
    Test On Analysis of Income Statement
 
 

Analysis of Financial Statements

The purpose of this module is to gain a basic understanding of accounting equations an the ability to determine strengths and weaknesses in different aspects of the business operation. Financial statements are the reports which many business decision are based upon and provide a basis for planning, budgeting, and controlling costs. In this course you will learn to read, understand and analyze financial statements.

 

Objective of the Course

As a result of this course you will be able to:

• Determine the different aspects of reading a l3alance Sheet
• Properly place assets and liabilities in the correct categories
• Understand the accounting formula for debits and credits
• Determine where the profits of a business go each month
• Understand the segments that make up

1. Balance Sheet
2. Profit and Loss Statement
3. Statement of Cash Flow

• Select the proper expense categories to post your expenses Determine the difference between Gross and Net Profit

Your instructor will now guide you through a balance sheet, profit and loss statement and a cash flow statement. You should take notes on these items and be prepared to answer questions about the Financial Statements when complete. This course is not meant to analyze the Income Statement so we will spend most of our time on the Balance Sheet and Cash Flow Statement.

 

Balance Sheet

ASSETS	THIS MONTH	LAST MONTH	VARIANCE
Cash on Hand	$3,176.74	$5,891.49	$(2,7l4.75)
Bank	15,900.90	14,360.32	1,540.58
Credit Cards	1,444.98	2,591.43	(1,146.45)
Accounts Receivable	6.41	17.90	(11.49)
Guarantee Deposits	7,902.00	7,902.00	0.00
Inventory	38,489.79	32,524.15	5,965.64
Prepaid Rent	0.00	4,584.00	(4,584.00)
Total Client Assets	66,920.82	67,871.29	(950.47)
Equipment	60,150.41	60,150.41	0.00
Accum. Depr. Equipment	(24,228.00)	(23,106.00)	(1,122.00)
Total Fixed Assets	43,633.41	44,755.41	(1,122.00)
TOTAL ASSETS	110,554.23	112,626.67	(2,072.47)
LIABILITIES
Sales Tax	$1,202.91	$1,178.36	$24.55
Fen. \Withholding & FICA	1,503.09	1,837.32	(334.23)
State Withholding	422.60	184.50	238.10
A/P Texaco	1,601.00	1,609.00	(8.00)
A/P Gasoline	0.00	3,768.65	(3,768.65)
A/P Other	12,591.15	9,636.72	2,954.43
Accrued Wages	1,300.00	800.00	500.00
Total Current Liabilities	18,620.75	19,014.55	(393.80)
Bank Loan	48,442.37	49,371.57	(929.20)
Total Long Term Liabilities	48,442.37	49,371.57	(929.20)
TOTAL LIABILITIES	67,063.12	68,386.12	(1,323.00)
OWNERS EQUITY
Net Worth January 1	$36,361.53	$36,361.53	$0.00
Current Earnings	60,260.60	50,656.43	9,604.17
Current Withdrawals	(53,131.50)	(42,777.41)	(10,354.09)
Total Capital	43,491.11	44,240.55	(749.47)
TOTAL LIABILITIES & CAPITAL	102,843.23	104,915.70

 

Department	Sales	Cost	Gross Profit	G.P. %	C.P.C
Fuel Gallons 205,000
Motor Fuel	$235,000.00	$218,654.00	$16,346.00	7.0%	$0.000
Cigarettes/Tobacco	$12,255.00	$9,000.00	$3,255.00	26.6%	$0016
Soft Drinks	$4,500.00	$2,900.00	$1,600.00	35.6%	$0.008
Juice/Waters	$3,800.00	$2,600.00	$1,200.00	31.6%	$0.006
Beer/Alcohol	$4,000.00	$3,100.00	$900.00	22.5%	$0.004
Snacks/Chips	$3,500.00	$2,300.00	$1,200.00	34.3%	$0.006
Candy/Gum	$2,678.00	$1,800.00	$878.00	32.8%	$0.004
Groceries	$3,288.00	$2,200.00	$1,088.00	33.1%	$0.005
H.A.B.A.	$1,777.00	$1,145.00	$632.00	35.6%	$0.003
Milk/Dairy	$1,121.14	$966.22	$154.92	13.8%	$0001
Bakery/Breads	$655.45	$422.76	$232.69	35.%	$0.001
Fountain	$2,500.00	$950.00	$1,550.00	62.0%	$0.008
Snack Bar	$2,166.00	$900.00	$1,266.00	58.4%	$0.006
Automotive/Oil	$1,200.00	$850.00	$350.00	29.2%	$0.002
Lotto/Lottery	$1,556.00	$1,475.00	$81.00	5.2%	$0.000
Car Wash	$8,800.00	$1,500.00	$7,300.00	83.0%	$0.036
Totals	$288,796.59	$250,762.98	$38,033.61	13.2%	$0.186

Expenses

Department	Dollars	Sales %	Gross Profit %
Employee Wages	$10,500.00	3.6%	27.6%
Payroll Taxes	$1,500.00	0.5%	3.9%
License & Taxes	$100.00	0.0%	0.3%
Rent of Loan Interest	$8,000.00	2.8%	21.0%
Maintenance/Repair	$300.00	0.1%	0.8%
Insurance	$400.00	0.1%	1.1%
Professional Service	$300.00	0.1%	0.8%
Interest/Bank Charges	$175.00	0.1%	0.5%
Supplies	$250.00	0.1%	0.7%
Store Use	$100.00	0.0%	0.3%
Advertising	$250.00	0.1%	0.7%
Travel/Entertainment	$50.00	0.0%	0.1%
Laundry/Uniforms	$250.00	0.1%	0.7%
Vehicle Expense	$70.00	0.0%	0.2%
Discounts/Refunds	$25.00	0.0%	0.1%
Utilities/Telephone	$1,900.00	0.7%	5.0%
Bad Debts	$50.00	0.0%	0.1%
Cash Short/(Over)	$33.00	0.0%	0.1%
Lease Equipment	$250.00	0.1%	0.7%
Credit Card Fees	$220.00	0.1%	0.6%
Equipment Depreciation	$1,000.00	0.3%	2.6%
Environmental Expense	$100.00	0.0%	0.3%
Royalties/Advertising Fees	$2,606.44	0.9%	6.9%
Total Expenses	528,429.44	9.8%	74.7%
Net Profit (Loss)	59,604.17	3,3%	25.3%

 
 

Formulas Used by Accountants to Prepare Balance Sheet

Assets - Liabilities = Net Worth

Net Worth + Liabilities = Assets

Net Worth - Assets = Liabilities

Formulas Used by Accountants to Prepare Profit and Loss Statement

Revenues - Cost of Goods Gone = Gross Profit

Gross Profit - Operating Expenses = Net Profit

Net Profit + Operating Expenses = Gross Profit

Gross Profit + Cost of Goods Gone = Revenue

Components of Cash Flow Statement

• Operations
• Investment
• Financing

Formula for Cash Flow

Net Profit (+ or -) Operation, Investments, Financing =Ending Cash
 
 

You have just started your business. The following items (based on their cost) are available to start. Beside each one, designate if it should be part of Assets, Liabilities or Net Worth.
 

Equipment	40,000
Note at Bank	150,000
Cash in Bank	10,000
Accounts Payable	5,000
Starting Capital	30,000
Goodwill	100,000

 

You have had your first month of operations. From the following information, prepare a simple Profit and Loss Statement.
 

Sales for the month were	$156,000
Cost of product for the month was	$124,500
Operating Expenses for the month were	-$20,000

 

• FOR EVERY DEBIT THERE MUST BE AN OFFSET CREDIT
• FOR EVERY CREDIT THERE MUST BE AN OFFSET DEBIT
• EVERYTHING MUST BALANCE
• ASSETS ARE NATURAL DEBIT BALANCES
• LIABILITIES ARE NATURAL CREDIT BALANCES
• NET WORTH IS A NATURAL CREDIT BALANCE
• REVENUE IS A NATURAL CREDIT BALANCE
• EXPENSES ARE NATURAL DEBIT BALANCES

You have completed your first month of operation and are now preparing your information

for the accountant. What information would you give the accountant to complete your Profit and Loss Statement Balance Sheet and Cash Flow Statement. Be prepared to discuss in class.
 

Below are a list of items that are found in a Balance Sheet. Place each one in the proper category listed.

Categories

• Current Assets
• Current Liabilities
• Capital Stock
• Fixed Assets
• Fixed Liabilities
• Retained Earnings
• Other Assets
• Other Liabilities
• Owners Draw

• Bank loan of 4 years
• Cash in bank
• Owner took out money for personal expenses
• Equipment
• Inventory
• Income tax owed
• Monthly net profit
• Deposit to utility company
• Company owes stockholder money
• Money put in to buy stock
• Accounts receivable
• Accounts payable

You are attempting to put together your Profit and Loss Statement Below please give the formulas to calculate the following:
 

Cost of Goods Gone
 

Gross Profit
 

Gross Profit Percentage
 

Net Profit
 

Key Terms and Concepts

These are key terms and concepts of this module:

1. Assets
2. Liabilities
3. Net Worth
4. Double Entry
5. Journals
6. DayBook
7. Debits and Credits

Review

Match one of the key terms and concepts listed above with one of the brief examples or definitions listed below. Try to find the best fit for the answers that seem to fit more than one term or concept. Get ready to defend your choices.

1. Ledgers that are kept to record transactions.
2. The term accountants use when posting entries to Journals.
3. Everything you own.
4. The book you post all transactions for the day.
5. The term accountants use as their system for doing the books.
6. Assets minus liabilities.
7. Everything you owe.

Test on Analysis of Financial Statements

Name of Participant
 

1. What is the formula to obtain Net Worth in a 13alance Sheet?
 

2. What is the formula to obtain the Net Profit in a P&L Statement?
 

3. What components make up the Statement of Cash Flow?
 

4. In a Profit and Loss Statement where is "Other Income" placed? placed?
 

5. Are Assets usually Debit or Credit balances?
 

6. what does "double entry" mean?
 

7. Name one item that would be classified as a Current Asset.
 

8. Name an item that would be classified as a Fixed Liability.
 

9. what is the formula for calculating Cost of Goods Gone?
 

10. what is the formula for calculating Gross Profit?

Analysis Of Income Statements

The purpose of this module is to teach the skills that are required to read, understand and to analyze income statements. The income statement, also known as the profit and loss statement, is the measure of how a business has performed over a specific period of time. Investments, purchases of assets and distribution of profit are just a few of the decisions that rely on the information provided in the income statement.

Objectives of the Course

As a result of this course you will be able to:

1. Calculate and evaluate Gross Profits
2. Calculate and evaluate Gross Profit Percentages
3. Understand percentage of expenses to Gross Profit
4. Determine what method of accounting your accountant is doing
5. Determine how bad accounting affects your profits and taxes
6. Analyze your Income Statement in detail
7. Analyze your mix of sales, gross profits and expenses
8. Analyze your inventory turns
9. Determine your inventory loss from the Income Statement
10. Why departmentalization is important

Criteria For Establishing Sales Departments

Sales Flow

If an item has substantial sales, it needs to be tracked on its own. For example in a snack shop, cigarettes should always be one department.

Gross Profit Percentages

Products which produce different gross profit percentages should be tracked separately. If not, when your profit and loss statement is produced, it is difficult to determine the proper weighted gross profit percentage. If the sales mix changes, it further complicates analysis of the gross profit margins arid percentages. An example is combining cigarettes with a gross profit percentage of 20% with groceries which has closer to a 35% gross profit margin.

Inventory Controls

It is difficult to control inventory of a product that is not isolated into its own sales department. If for example, dairy and fountain are combined, it is difficult to control the inventory of either department. It also makes it more difficult to be able to spot shrink(age in those product.
 

Suggested Departments	Other Possible Departments
Gasoline
Cigarettes
Tobacco
Soft Drinks
Beer/Wine
Fountain
Deli/Snack Bar
Snacks/Chips/Nuts
Candy/Gum/Cookies
Groceries
Milk/Dairy
Juice/Waters
News/Magazines
H.A.B.A.
Automotive/Oil
Lottery

 

From the page and Department/PLU Codes, fill in the departments you think your station should have and why. Be prepared to discuss in class.
 

DEPARTMENT 1	DEPARTMENT 2	DEPARTMENT 3	DEPARTMENT 4
ARTICLE Code Name	ARTICLE Code Name	ARTICLE Code Name	ARTICLE Code Name
DEPARTMENT 5	DEPARTMENT 6	DEPARTMENT 7	DEPARTMENT 8
ARTICLE Code Name	ARTICLE Code Name	ARTICLE Code Name	ARTICLE Code Name

DEPARTMENT 9	DEPARTMENT 10	DEPARTMENT 11	DEPARTMENT 12
ARTICLE Code Name	ARTICLE Code Name	ARTICLE Code Name	ARTICLE Code Name

DEPARTMENT 13	DEPARTMENT 14	DEPARTMENT 15	DEPARTMENT 16
ARTICLE Code Name	ARTICLE Code Name	ARTICLE Code Name	ARTICLE Code Name

DEPARTMENT 17	DEPARTMENT 18	DEPARTMENT 19	DEPARTMENT 20
ARTICLE Code Name	ARTICLE Code Name	ARTICLE Code Name	ARTICLE Code Name

DEPARTMENT 21	DEPARTMENT 22	DEPARTMENT 23	DEPARTMENT 24
ARTICLE Code Name	ARTICLE Code Name	ARTICLE Code Name	ARTICLE Code Name

Department	Sales
Fuel Gallons 205,000
Motor Fuel	$235,000.00
Cigarettes/tobacco	$12,255.00
Soft drinks	$4,500.00
Juice/Water	$3,800.00
Beer/Alcohol	$4,000.00
Snacks/Chips	$3,500.00
Candy/Gum	$2,678.00
Groceries	$3,288.00
H.A.B.A.	$1,777.00
Milk/Dairy	$1,121.14
Bakery/Breads	$655.45
Fountain	$2,500.00
Snack Bar	$2,166.00
Automotive/Oil	$1,200.00
Lotto/Lottery	$1,556.00
Car Wash	$8,800.00
Totals	$288,796.59
Cost of Goods Sold
Purchases	$241,500.00
Total Cost	5241,500.00
Gross Profit	$47,296.59

Expenses

Department	Dollars	Sales %
Employee Wages	$10,500.00	3.6%
Payroll Taxes	$1,500.00	0.5%
License & Taxes	$100.00	0.0%
Rent of Loan Interest	$8,000.00	2.8%
Maintenance/Repair	$300.00	0.1%
Insurance	$400.00	0.1%
Professional Service	$300.00	0.1%
Interest/Bank Charges	$175.00	0.1%
Supplies	$250.00	0.1%
Store Use	$100.00	0.0%
Advertising	$250.00	0.1%
Travel/Entertainment	$50.00	0.0%
Laundry/Uniforms	$250.00	0.1%
Vehicle Expense	$70.00	0.0%
Discounts/Refunds	$25.00	0.0%
Utilities/Telephone	$1,900.00	0.7%
Bad Debts	$50.00	0.0%
Cash Short(Over)	$33.00	0.0%
Lease Equipment	$250.00	0.1%
Credit Card Fees	$220.00	0.1%
Equipment Depreciation	$1,000.00	0.3%
Environmental Expense	$100.00	0.0%
Royalties/Advertising Fees	$2,606.44	0.9%
Total Expense	$28,429.44	9.8%
Net Profit (Loss)	$18,867.15	6.5%

Department	Sales	Cost	Gross Profit	G.P%	C.P.G
Fuel Gallons 205,000
Motor Fuel	$235,000.00	$218,654.00	$16,346.00	7.0%	$0.080
Cigarettes/tobacco	$12,255.00	$9,191.25	$3,063.75	25.0%	$0015
Soft Drinks	$4,500.00	$2,925.00	$1,575.00	35.0%	$0.008
Juice/Waters	$3,800.00	$2,470.00	$1,330.00	35.0%	$0.006
Beer/Alcohol	$4,000.00	$3,000.00	$1,000.00	25.0%	$0.005
Snacks/Chips	$3,500.00	$2,275.00	$1,225.00	35.0%	$0.006
Candy/Gum	$2,678.00	$1,740.70	$937.30	35.0%	$0.005
Groceries	$3,288.00	$1,972.80	$1,315.20	40.0%	$0.006
H.A.B.A.	$1,777.00	$1,066.20	$710.80	40.0%	$0.003
Milk/dairy	$1,121.14	$224.23	$896.91	80.0%	$0.004
Bakery/Breads	$655.45	$393.27	$262.18	40.0%	$0.001
Fountain	$2,500.00	$750.00	$1,750.00	70.0%	$0.009
Snack Bar	$2,166.00	$1,191.30	$974.70	45.0%	$0.005
Automotive/Oil	$1,200.00	$720.00	$480.00	40.0%	$0.002
Subtotal(C-Store)	$43,440.59	$27,919.75	$15,520.84	35.7%	$0.076
Lottery/Lotto	$1,556.00	$1,478.20	$77.80	5.0%	$0.000
Car Wash	$8,800.00	$1,500.00	$7,300.00	83.0%	$0036
Totals	$288,796.59	$249,551.95	$39,244.64	13.6%	$0.191

Expenses

Department	Dollars	Sales %	Gross Profit %
Employee Wages	$10,500.00	3.6%	26.8%
Payroll Taxes	$1,500.00	0.5%	3.8%
License & Taxes	$100.00	0.0%	0.3%
Rent or Loan Interest	$8,000.00	2.8%	20.4%
Maintenance/Repair	$300.00	0.1%	0.8%
Insurance	$400.00	0.1%	1.0%
Professional Service	$300.00	0.1%	0.8%
Interest/Bank Charges	$175.00	0.1%	0.4%
Supplies	$250.00	0.1%	0.6%
Store Use	$100.00	0.0%	0.3%
Advertising	$250.00	0.1%	0.6%
Travel/entertainment	$50.00	0.0%	0.1%