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Helping Canadian businesses beat the odds!
Helping Canadian businesses beat the odds!
Hi there, welcome to another edition of ask for a CPA. Um, today we’re talking about the components of your financial statements and I’m here with Laura. Laura, thanks for, uh, for being here today. So, uh, Laura, you joined the firm a little while ago and they’ll tell us about your background, your education at Macewan Edmonton CPA.
Sure, absolutely. Uh, so I’m on my fourth year in the bachelor, a commerce program and I’m with a, I chose a, an accounting major, a this class this semester I’m taking an international business class with a focus on economics and next semester will be a taxation class specifically for income tax returns, Edmonton CPA corporate and personal and uh, and in some classes I’m at the top of my class
right on, right on a little thanks for. Thanks for, for being here today. And thanks for sharing that. So, um, you will do the statistic that goes along with this topic is 80 percent of all small business owners, Laura, so 80 percent of them would score the less than 70 percent on a basic business financial literacy test. So, Edmonton CPA which sounds like, okay, that’s not so bad. It’s actually, um, you know, pretty bad if you’re running a business. So these are things like, you know, what is an accrual, you know, what are the things that affect the cash flow of your business? Uh, the majority of a business owners are going to get it, you know, for some pretty key questions wrong. So this is, you know, the components of your financial statements, understanding them. It’s important for most business owners and of the story that we get is business owners.
They’re not familiar enough with their financial statements to make day to day decisions. So they’re, they’re kind of looking at the bank statements. They’re not really using their financial statements whether they’re reliable or not, they just don’t have enough confidence in their own ability to read them. So, Edmonton CPA you know, this is what a thing that we’re trying to bring some awareness to it and try to increase the financial literacy of know the average business owner. So what do you think are the questions that the average business owner should be asking when it comes to the components of their financial statements?
Okay. Well, I think one question would be, what are the three main question components of your financial statements?
So the main, the three main components of your financial statement is your income statement, your statement of retained earnings, and then your balance sheet, income statement, statement of retained earnings, and then the balance sheet would really be the three components that you’re looking at. What is the balance sheet? So the balance sheet. So if we, your balance sheet is like a snapshot in time. If you could stop time at a particular moment, these are your assets, Edmonton CPA, and these are your liabilities. So these are the things that you own and these are the amounts that you owe at a particular point in time. So it doesn’t address, you know, a range of time that addresses a particular point in time. If someone were to stop the clock at midnight on that day, you know, this much is in the bank account and we owe this much on the credit card.
Why is the balance sheet most important? Will the balance sheet? You’ll really does show what assets and liabilities that the business has. So it has all the resources that the business has to work with in terms of cash or receivables, that, you know, the business is owed money or inventory that the business can sell as well as all the obligations that the business has in terms of these are the accounts payable, um, you know, these which is the amount that is owed to suppliers and you know, Edmonton CPA the balances of loans, you know, these are the method that is over the long term to the lenders and the finances of the business.
What would you say to an entrepreneur who look at the income statement without looking at the balance sheet? Yeah, that’s one of the common issues we see with business owners that they, they, they probably can understand the income statement a little better. Maybe it’s a little more intuitive. So they tend to look at that income statement in a vacuum. And the problem with that is, you know, there’s often mistakes with interim reporting most into reporting. So Edmonton CPA when I say interim reporting, it’s reporting that’s done before the year end. Um, so it hasn’t been subjected to the reviewer the scrutiny of a CPA. So often there’s mistakes on these balance sheet and these mistakes on the balance sheet will kind of mask really significant errors on the income statement. So the business owner thinks that they’re making money or thinks that they’re losing money and they’re relying on this income statement and they’re deciding to buy equipment or hiring new staff or lay off staff based on the income statement. But the entire thing is unreliable because there’s a mistake, a glaring error on the balance sheet. So really what you, what those business owners need to understand is you need to look at the balance sheet to identify if there’s any anomalies before relying on that income statement to make significant business decisions.
What items are on the, what items are on your balance sheet. So the items on the balance sheet you’re starting, you know, right at the top is the cash. You know, it’s the most liquid asset that you have is the cash, you know, moving down, you’re going to have the accounts receivable. These are the amounts that your customers owe you that you haven’t been paid yet. Then you get into things like inventory. So these are the products that we have available to sell. We haven’t yet sold, Edmonton CPA, you know, then common components like the property, plant and equipment, the trucks, the machinery, the buildings that are involved in the business and you know, at, at the top, those assets are group as assets and there’ll be totaled as assets. They’re moving below that you’re going to have the liabilities. So these are the, um, the accounts payable. Um, these are the loans payable in the business. And then moving down, we’ll have the equity section, know the, the, the amount of share capital in the business and retained earnings and the total of the liability and the equity, um, will equal the total of the assets. And that’s why they call it the balance sheet.
What is an income statement?
So an income statement, unlike the balance sheet that shows you a snapshot of a picture in time, the income statement is covering a period of time. So from January to December, or from January first to January 31st, so let’s show you how much money was generated in that time period and what expenses were incurred in that time period working down to a net number or the net profit or net loss of difference between the money brought in and the, Edmonton CPA the amount of expenses again in a time period
is the same as a
profit and loss statement or PNL. Yeah, the income statement is the same as a p and l. it’s just nomenclature. Edmonton CPA, you know, most formal financial statements for Katie and accountants, they’re going to call the income statement an income statement. A lot of software developers, we’ll call it the profit and loss statement. So if you’re looking at intuit quickbooks, they’re going to call it a profit and loss, but there’s, there’s no difference. It’s tomato, tomato, a income statement, profit and loss. It’s the same document
looking at what are the items on the income statement.
So starting from the top of the income statement, you’re going to have the revenue rate at the top. Now rate under the revenue, you’re going to have the cost to sale. So these are the direct costs of sales. So for example, if you’re a contractor, you’re going to have, you know, the price of the contract is going to be the revenue and then you know, all of the wood and the supplies and the nails and the subcontractors, but those are your direct costs to sales. So under that, then you’re going to get to your gross profit. So after you paid the costs that were directly attributable to that sale, you get a gross profit. Now moving down below that, you’re going to get into the general expenses. Things like branch in the office, I’m the amortization of equipment. Uh, the office supplies the utilities that these lots of times these are expenses that would occur regardless or if you had the job or not. Um, and then below that you’re gonna have a total of those general expenses. Below that total, you’re going to get what’s called an income from operations. And then income from operations is how much the business makes before any other items. So, um, and then below that income from operations, Edmonton CPA you’ll get, you know, things that directly attributed to the operations, things like tax, you know, we often put the owner’s salary there and then finally you get to the net income or net loss to the business.
What is the statement of retained? So the statement of retained earnings is almost like the cumulative balanced of the income or profits left in the corporation. So if a corporation starts from zero and it makes $100,000, that retained earnings will be $100,000, um, and then the dividends can be paid out of that retained earnings. So Edmonton CPA it’s basically the earnings in the corporation, a less the dividends had been paid out over time. It’s a cumulative kind of a running total since the beginning of the, the corporation.
How many pages should each of these statements be? So it’s really important that these statements, you, you want them to be limited to one page. You want to be able to review your balance sheet and review your income statement in a single page. Because one of the issues is always, you know, this needs to be a really succinct document that you can use to make business decisions. You can always drill further into the general ledger to see individual transactions, but if you can’t fit all of your assets and liability on one page, and if you can’t fit all of your revenue and expenses on one page, it gets very difficult to make business decisions over time. Edmonton CPA, so it really needs to be a document that can be on one page. So the business owner can efficiently make business decisions.
So I think that’s a, that’s the time we, we have here for today. Just as a reminder or you know, we always, if you’re interested in learning more, we, we do offer free consults. Feel free to give us a call and, uh, you know, we’ll set up a free consult. Are always happy to meet with the business owners, Edmonton CPA, and you know, if you have any other issues that you’d like to address, no. Feel free to leave as a comment below and we’ll try to address any of those, uh, items or questions that you have in any future videos that we do later on. Thanks very much.