Explanation should include the following:
- Income, or profit and loss (P&L), statements
- show how much money a business earns or loses over a specified period of time
- show the profitability of the business
- alert the business owner to the financial value of the business at any given time
- show trends useful in forecasting.
- Cash-flow statements
- show the amount of money coming into a business and the amount of money going out
- help the owner determine whether the business's revenue exceeds its expenses.
- Balance sheets
- are statements of the assets, liabilities, and capital of a business at at particular point in time, detailing the balance of income and expenditure over the preceding period.
- Start-up costs
- are finances needed before initiating a venture (e.g., equipment and supplies, office space, inventory, legal and accounting fees, communications, advertising and marketing, market research, utilities, licenses and permits, payroll, professional consultants, insurance, taxes).
Process/Skill Questions:
- How might a new business gather information to project income and expenses?
- How does an income, or P&L, statement depict business profitability?
- How is gross profit calculated on an income statement?
- What is the difference between variable and fixed expenses on an income statement?
- What could be the result if a business does not generate an income statement?
- How are income statements used for product/service planning?
- What are the legal and business consequences of false information reported in financial statements?
- How do department managers use an income statement when monitoring a budget?
- What is the primary purpose of a cash-flow statement?
- Why is it important for business owners to track cash flow?
- What could be the result if a business did not generate a cash-flow statement?
- How are cash-flow statements used for planning? How else (i.e., other than for planning) are cash-flow statements used?
- What is the difference between cash receipts and cash disbursements?
- Why must an entrepreneur know the net worth of the business?
- What does net worth tell a business owner?
- Why should an entrepreneur track business assets?
- How often should an entrepreneur review and update the company’s balance sheet? Why?
- What are viable options for obtaining funding to cover start-up costs?