CHAPTER 8 FINANCE: ANALYZING FINANCIAL STATEMENTS AND CREATING PROJECTIONS Finacial len Fd lust indicate how much money is required to generate income and how much is going to be spent ona particular transaction; and how much will be borrowed and paid.” LEARNING OUTCOMES Prepare financial statement such as balance sheet, income statement, cash flow projections and summary of sales and receipts; Interpret financial statements; and Identify where there is a Profit or loss for a business. FINANCIAL PLAN + It refers to the capital investment and sources of funding the operation of the business. It shall show financial projections over a period of one year and five years program and shall determine the rate of return on investments. It must be able to show the return on equity and break even sales as well as pricing sensitivity test. * The process of determining whether an entrepreneur's idea is a viable foundation for creating, a successful business. + Italso helps in comparing the costs and benefits over time to determine whether a project is profitable or not. PREPARATION OF THE PROJECTED FINANCIAL STATEMENTS According to Dr. Baltazar (2015), the proponent should prepare the following projected financial statements for a period of three (3) or five (5) years, which is composed of the following: The Projected Income Statement shows the revenues, cost of goods sold/ cost of sale, operating expenses categorized into two types: marketing/ distribution expenses and administrative/office expenses, other income and expenses, financing 151ENTREPRENEURIAL MANAGEMENT ine fi et after tax or a net loss, ncome taxes and the bottom line figure, the net profit aft costs, ‘The income statement describes company’s ability £0 generate cash by computing for sales and expenses. The Projected Statement of Cash Flows which reflect the sources and ses of cash and cash equivalents. There are three (3) sources and uses 0) EA8"" Tt Me Operating Activities (proceeds of from cash sales/ cash service revenue E payinen tor expenses, payment of inventories for cash and the payment of accel payable), Investing Activities ( proceeds from the sale and purchase for cash 0 the e ve = Plant and Equipment and Investments), and lastly, Financing aoe re cee proceeds from the investment of the owners/ issuance of share of stocks, procee #4 from bank borrowings and cash payment for the withdrawal of the owners an payment of cash dividends). nt of Financial Position which shows The Projecte he Projected Balance Sheet/ Statemet time. It reflects the the financial position of the enterprise as of the given period of total assets together its total liabilities and total equity/ net worth/net assets. The balance sheet shows financial condition by accounting for assets (cash, receivables, inventory, equipment, property, investments) and liabilities (accounts payable, salaries, taxes, and bonds, notes and mortgage payables) This statement reflects the enterprise financial position as of a given date in terms of its total assets, total liabilities and total equity. Assets represent the resources controlled by the entity asa result of past events and from which future economic benefits are expected to flow to the enterprise. The asset has two categories: the current assets and the non-current assets. Current assets provide economic benefits for a period of one year or the normal operating cycle, whichever is shorter. Examples of current assets that are reported in the Statement of Financial Position according to liquidity (the ability of asset to be easily converted into cash and to pay its short-term obligations on time) are: Cash and cash equivalents Marketable Securities/ Short-Term Investments ‘Accounts Receivable , net of allowance for bad debts Short-Term Notes Receivable Other Non-Trade Receivables such as Advances to Employees Inventories Prepaid Expenses NOG RON 152ENTREPRENEURIAL MANAGEMENT examples of Non-Cash Assets are: 1. Property, Plant and Equipment Land Building, net of accumulated depreciation a Improvements net of accumulated depreciation ie piipment, Het of accumulated depreciation aise ure and Fixtures, net of accumulated depreciation 5 Wipment, net of accumulated depre Store Furniture and Fixtures, net of Transportation Vehicle , ion accumulated depreciation net of accumulated depreciation Long-Term Investments 2.1 Inve: 2.20 In ciates ‘stment in Bonds 3. Intangible Assets 3.1 Goodwill 3.2 Patent, net of amortization 3.3 Trademark , net of amortization 3.4 Copyright, net of amortization 3.5 Leasehold Rights, net of amortization 3.6 Computer Software , net of amortization Liabilities are present obligation of an enterprise arising from past events, the settlement of which is expected to result in an outflow from the entity of economic resources embodying economic benefits. Liabilities have two categories: the current liabilities and non-current liabilities. Current liabilities are economic obligations that are payable within one year or normal operating cycle, whichever is shorter. Examples are shown below: 1. Trade accounts and notes payable 2. Accrued expense payable such as accrued salaries payable (expense already incurred but not yet paid) 3. Unearned Income or Revenue (income already received in advance but not yet earned) Income Tax Payable Withholding Taxes Payable SSS Premiums Payable Pag-IBIG Premiums Payable Phil Health Premiums Payable PNAS 153OO _ <<< ct NTREPRENEURIAL MANAOE MENT payable within one jf pat is Non-current liabilities are economic obligations tat Year, Examples are 1 Long-Term Bank Loan Payable 2. Bonds Payable nterprise after aeaots of the ets and y, net tal is equity. ‘ver total liabilities fotuetse SaPital represents the residual interest in the deducting all of its total liabilities. Another term for cap! net worth which is measured as the excess of total assets OVEF capital is computed as follows: For single proprietorship and partnership, the tment or Beginning Capital Add: Additional investment Net Income Total Less: Withdrawal/ Drawing Ending Capital The resulting net loss has a negative impact and was deducted from the capital balance. For corporation type of business, the capital is computed as follows: Issued shares at par value Additional paid-in capital Share premium in excess of par value Additional paid-in capital from treasury stock transactions Retained Earnings (all net income or net loss is closed under this account) Treasury shares, at cost Total Stockholders’ Equity 154ENTREPRENEURIAL MANAGEMENT The format of the Projected Balance Sheet/ Statement of Financial Position 7 Name of Company Projected Balance [Projected Balbir Sheet/Statement of Financial Position Asset Year 1 | Year 2| Year 3| Year 4 | Year 5 Assets 1] i Current Assets Cash and Cash Equivalents (Schedule?) Marketable Securities/ Short-Term Investments Trade and Other Receivable (Schedule 8) Inventories (Schedule 9) Prepaid Expenses (Schedule 10) Total Current Assets Non-Current Assets Property, Plant and Equipment, net “| (Schedule 11) Long-Term Investment (Schedule 12) Intangible Assets (Schedule 13) Total Non-Current Assets | Total Assets Liabilities and Equity Current Liabilities (Schedule 14) Non-Current Liabilities (Schedule 15) Total Liabilities Equity Capital/Stockholders’ Equity (Schedule 16) Total Liabilities and Capital 155ENTREPRENEURIAL MANAGEMENT : atement, the proponent Prior to the preparation of the projected income ” Finished Goods, which are complete products ready s which are partially completed products being made available for sale; for sale; » Goods (Work) in-proces requiring further processing before > Raw Materials, which are yet to: be processed in the company’s operational activities; and » Factory or Manufacturing Supplies, which are like raw materials, but whose uses are not physically part of the manufacturer process, Examples of these are candy wrappers, boxes and bottles of food products, etc. f. Notes Receivables, are open accounts supported by formal written promises to pay. 1.2 Investments-tangibleand intangible assets which are purchased which future benefits is/are expected. Examples of these are purchases of machineries and merchandise, the granting of study grants, scholarships and seminars or the entertainment of prospective customers. 1.3 Fixed Assets ~ are assets of relatively permanent nature, which are used in the company’s business operations and are not intended for sale, Examples of these are land, buildings, machineries and equipment and furniture and fixtures. 1.4 Intangible Assets ~are long-lived assets with no form of physical characteristics whose values could be traced in the form of rights, privileges or “competitive advantages” they give to the company. Examples of these are patents, good wills, lease holdings, copyrights, franchise, trademarks and trade names.vy 5 Other Assets: of which the 15 a b. ENTREPRENEURIAL MANAGEMENT Most common are: Organizational costs, are-e Xpenses incurre he forming, org establishment of business These may beter oneaNN Ro » Legal (registration) fees, » Promotional or underwriting fees; » Incorporation fees; » Cost of printing Of certificates of ownership (« tocks) and other printed ind requirements of the compan » Cost of service rendered that helped in the ‘ formation of organization or establishment of the busin ess. Deferred charges are costs that are plant and equipment nor int. future periods and are amor Examples are: neither inventories prepaid expenses, angible which represent benefits for some tized over their (future) periods benefited. » Plant management costs > Deferred pension costs » Research and development costs » Organization costs 2 Liabilities 2.1 Current Liabilities- are obligations incurred by the payable on a relative shortened (not more than company which are a year) or normal operating cycle and whose payment requires the use of current assets or the creation of “other” current liabilities. A short rundown of some of these are: b. c Accounts Payable refers to indebtedness representing large accounts or a result of a trade with sources/suppliers. Notes Payable are obligations evidenced by a formal written promise to pay. Dividend Payable are the unpaid dividends declared by the company Accrued Expenses are obligations for expenses already made but not yet made. Income Tax Payables are liabilities for income tax payments computed from the current period Customers’ Accounts with Credit Balances are obligations incurred as a result of advance payments by customers for the company’s products either in the form of undelivered items, overpayments, returns, allowances and errors. : 179ENTREPRENEURIAL MANAGEMENT scrions which will 2.2 Long Term Liabilities ~ are obligations whic! mature from a Minimyn, . Long term liabilities qo vments. The most common of one (1) year or beyond a normal operating ‘ not require the use of current assets for thelr Pay of these are: i » under seal, to pay a speci a. Bonds Payable are formal promises made Sa ele sc amount of money at a specified future ane TS rincipal stipulate periodic installment dates and interests is fully paid : id balances of bi b. Premiums on Bonds Payable, refers to unpaid ‘onds purchased in excess of their face values. 2.3 Other Long Term Liabilities - may be in the form of Pensions, which retirement benefits are given to the retired employees of the company. 24 Deferred Revenues ~ are income received by the company but which it dig not yet earn. Examples include: > Long-term leasehold advances > Fees received in advance for long term service > Deferred gross profit on installment sales 3. Stockholders’ Equity and Owners Capital 180 a. Stockholders’ Equity - refers to residual interest of the owners on the assets of the company (in this case, a corporation) measured by the excess of assets over liabilities Paid-In-Capital - This represents the investments actually paid by the company’s stockholders. This item includes retained earnings capitalized as stock dividends, gifts or donations of any assets made by the source, including persons or entities other than the company’s stockholders. Capital stocks ~ are the portions of paid-in capital representing the total stated value of the shares of stocks issued by the company. Treasury Stocks ~ refers to the company’s own stocks issued and then re-acquired (but not cancelled) by the company. e, Retained Earning: eta amit the cumulative balance of periodic earnings, dividend distributions, prior period adjustments and special distributions to stockholders. These may be: » Unappropriated Retained Earnings, t t which is that portion of retained earnings that is free and which could be declared as dividends; or Appropriate Retained Earnings, re i | t ” Fepresents that other portion of retained earnings that has been restri ivi me restricted from any dividend