Understanding Financial Statements for Business Owners and Entrepreneurs | Larry Aiello | Skillshare

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Understanding Financial Statements for Business Owners and Entrepreneurs

teacher avatar Larry Aiello

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

6 Lessons (18m)
    • 1. Introduction to Financial Statements for Business Owners and Entrepreneurs

      1:30
    • 2. Balance Sheets

      3:53
    • 3. Income Statements

      4:16
    • 4. Statement of Retained Earnings

      3:28
    • 5. Statement of Cash Flows

      3:48
    • 6. Skillshare Bonus Final Lesson

      1:11
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About This Class

If you are a small business owner and you want to get a grasp of the basic financial statements that are used by virtually all small businesses in existence today, then my course will guide you in the right direction.

I will use terms that the layperson can understand in a simple and concise manner.

The main financial statements we will look at include:

  • Balance Sheet
  • Income Statement
  • Statement of Retained Earnings
  • Statement of Cash Flows

These statements can help you evaluate how a business is performing and the overall health of a business.  One statement by itself can only show you a part of the picture.  When you look at all the financial statements as a whole then you can gain valuable insights about your own business and even your competitors.  

So sign up for my course today and discover how a little knowledge about the basic financial statements of a business can empower your decision-making to a new level. 

Meet Your Teacher

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Larry Aiello

Teacher

Hello, my name is Larry Aiello and I am an accounting professional with 30 years accounting experience and a graduate of the University of Florida.

My experience covers a wide variety of industries including real estate, healthcare, financial services and doing a lot of different tasks related to the business world. And I’m also a big geek in figuring out how the computer can improve our lives.

I really enjoy teaching and sharing my knowledge with others no matter what the subject matter.

I grew up speaking Italian at home and developed a love for the Italian language at a very young age as we would travel back-and-forth every year to visit my family and friends. Early on I realized that knowing another language is indeed a gift. It allows you to have relation... See full profile

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Transcripts

1. Introduction to Financial Statements for Business Owners and Entrepreneurs: Hi, this is Larry Aiello. Thanks for stopping by my course on understanding financial statements for business owners and entrepreneurs. If you are a small business owner and you want to get a grasp of the basic financial statements that are used by virtually all small businesses in existence today, then my course will guide you in the right direction. I will use terms that the late person can understand in a simple and concise manner. The main financial statements we will look at include the balance sheet income statement, statement of retained earnings and statement of cash flows. These statements can help you evaluate how businesses performing in the overall health of a business. One statement by itself can only show you a part of the picture. But when you look at all the financial statements as a whole, then you can gain valuable insights about your own business and even your competitors that operate in your industry. I have 30 years of accounting experience, and I've helped entrepreneurs get their QuickBooks an accounting set up properly. But very often, when we go over the financial statements for the first time, they might as well be reading hire a Cliff ICS. They just need a little overview about what those statements are and what they mean. And that's what I'm here to do, to clarify the big picture for you and to turn higher Cliff ICS into simple English. So sign up for my course today and discover have a little knowledge about these basic financial statements of a business can empower your decision making to take your business to a new level. Thank you. 2. Balance Sheets: good day and welcome back. This is Larry. I yellow on another lesson. So in this lesson will be the first of a few lessons describing the various financial statements that a company can use to evaluate how it is performing. Of course, there are other statements that can be prepared for various reasons, such as sales reports, vendor lists, purchases by vendor, etcetera. But I will only focus on the main financial statements, which are pretty standard. The first statement we will look at is the balance sheet balance sheet of a company is a snapshot of a moment in time that evaluates the health of a company. The date chosen is usually at the end of the month at the end of the quarter or at the end of the year. Example December 31. However, in theory, the end of any day can be chosen. Think of a balance sheet as a picture as opposed to a movie. It's a snapshot, a moment in time of your business. A good accountant can look at a balance sheet and discern the overall financial health of the company. When you compare current balance sheet to previous balance sheets that can give you an idea of where the company came from and where it is. Heading the balance sheet is the basic accounting formula that we learned earlier in the course when we learned that assets minus liabilities equals equity. We can display it like this, but very often you will see that the liabilities air flipped over to the right side. So the formula then becomes assets equals liability plus equities. That leads to a simple presentation of a balance sheet where the assets are on the left and the liabilities and equity are on the right side of a two column report. If you think back to our lesson on double entry accounting, the assets on the left side are increased by debits, and the liabilities and equities are on the right side, and they are increased by credits. Common protocol is to separate out your assets and liabilities into a current portion or short term portion. Those air item that are that can be quickly converted to cash within a year, and then the other section will be for items that are non current or long term generally items that can be converted to cash over a year. The items are usually listed in the order in which they can be converted to cash. This cash will be the first item on the balance sheet and then usually inventory what items such as buildings, which takes a lot to liquidate. Listed later, those would be in the non current section. The other item on the balance sheet that is of importance will be an item called retained earnings. This is the amount of profits that have been accumulated during the life of the business. Many people confuse this with a cash number, but it's not cash. If your bike shop makes $10,000 a year net profit the retained earnings after year one would be 10,000 after Year two. If the same thing happens, your retained earnings balance would be 20,000. And then in Year three, if you have the same thing happen again, if you make another 10,000 and $30,000 will be the amount of your retained earnings balance at the end of year three. That's assuming that there are no dividends to, you know, pay out any dividends. There is a financial statement that deal specifically with retained earnings in another lesson, and we will go over that in the future. But for now, that will wrap up the lesson on a company's balance sheet, and we will continue on in the next lesson. Thank you. 3. Income Statements: Welcome back this Larry Aiello. So in this lesson, we will take a look at one of the financial statements called the Income Statement. The income statement is a financial statement that shows you have a company performed over a certain period of time, usually a month, 1/4 or a year. You could think of this like a movie of a business as opposed to the balance sheet, which is a picture or a snapshot of the business. This is sometimes referred to as a profit and loss statement or a P and L. It will list out the revenue items in the first section, and then it will be followed by the expenses. And then what is left over will be the income. Thus it is based on one of our accounting formulas of revenue minus expenses equals net income. You will often hear of that income being referred to as the bottom line. Some businesses will have a cost of goods sold section, and we'll deduct that from revenue to come up with a gross profit. For example, Tom sell bicycles and pays $100 each per bike, but sells them at $400 apiece if he sells 10 bikes for the month, his income statement would look like this. He would have sales of $4000 cost of good soul cost of the bikes of $1000 he would have a gross profit of $3000. So the cost of goods sold section pertains to businesses that sell merchandise, retail or even at a wholesale level, as opposed to service. Businesses will not have a cost of goods sold section. They may have a cost of services provided section, but not a cost of goods sold. Then, after the cost of goods sold section, you will see the other expenses of the company usually broken out in different sections. Then you will see operating expenses in the next section. These air costs that are related to the core business, such as rent applies and overhead. And then you will see non operating expenses in another section. These air costs not related to the core business and are usually interest, expense, gain or loss on any investments that the business maybe doing appreciation, etcetera. You may even see another section for extraordinary type items, things that are peculiar in nature and not a normal part of their operations. This could be damaged due to a on external event like a flood. Or a tornado could report a loss related to the sale of a business unit or cost involved in a lawsuit. Settlement. Etcetera, appreciation and taxes are other items that are sometimes reported in different sections. In essence, you are taking the same pie and presenting it in different sections or in a different manner. The highlight certain aspects of the business. If you follow the stock market, often times you will hear of a company's EBITDA earnings or earnings before interest, taxes, depreciation and amortization. E b i t d A. This is a figure that comes from the income statement, and it's stripping out all of the non operational expenses. Come up with a bottom line that gives you an accurate result of the operations on Lee. Sometimes you will hear the term comparative income statement that will show you to timeframes or even mawr that can help you make comparisons like this year versus last year , this year versus last year and two years ago, etcetera. Just like every other financial statement, the income statement doesn't tell the whole story. But it could tell you a good chunk of the story. A company can be profitable, but it can still go out of business. Depending on its cash flow. We will look at the cash flow statement in a future lesson. So that will finish off our discussion on the income statement. We will next look at the statement of retained earnings. Thank you for joining me today. 4. Statement of Retained Earnings: Welcome back. This is Larry Aiello. So in this lesson, we will take a look at the statement of retained earnings in a statement that shows you the changes of what happened to a company's retained earnings over a period of time. Retained earnings are the lifetime earnings of a business that have not yet been distributed as dividends. Many people think that dividends are an expense similar to a payroll item, but in fact, dividends act as a distribution of the company's equity. Thus, it is a balance sheet item. Have you ever seen a mutual fund? After they declare a dividend or stock? The price generally goes down because they're taking out some equity. That's the theory behind that. This is a statement that is not very commonly used because there are only a couple of transactions that impact. This statement becomes important if you are distributing dividends to shareholders, partners, owners, etcetera. If you are operating a business and you are the only owner or shareholder than the statement becomes irrelevant in your situation, but we will take a look at it anyway. Since the transactions are few that impact this statement, many companies prepare this statement on Lee when asked by their lenders or by potential business partners, etcetera. So this is a formula for retained earnings that will, in essence, be the retained earnings statement. You basically take your beginning retained earnings number you add in your net income for the time period, and then you take away. You subtract any dividends that you paid back to your owners, and then you have your ending retained earnings balance. Let's take a look at an example to make this more clear. Tom's bike business in his first year of business was a huge success. His retained earning statement would look like this is beginning. Retained earnings had a zero balance and he had a net income of $50,000 for the year. So he decides to pay $20,000 to his partners. So you take the zero of beginning balance, plus the 50 of what he made. He's taken out 20 to pay as partners, so he's he's ending up with a $30,000 retained earning balance for the end of the year. In Year two. He does even better and decides to increase his dividend, so he has 30,000 beginning and retained earnings. But let's say he makes $90,000 in that income and decides to pay $40,000 in dividends. That will even ending retained earnings balance of $80,000. So you can see that this retained earning statement serves as a bridge between the income statement and the balance sheet for a company information from the income statement i e. The net income. That's the only thing that will flow onto the retained earning statement, and the end result ends up on the balance sheet. It is also important to realize that the retained earnings is not the same as cash. Company can be using debt to finance his business and have a good retained earnings number , but can be operating with little cash. So that will finish off our discussion on the statement of retained earnings. If you have any questions, please leave them in the discussion board and we will continue on to the next statement. The cash flow statement In the next lesson. Thank you 5. Statement of Cash Flows: Okay, Welcome back. This is Larry Aiello. So in this lesson, we will look at the final statement of the main ones that companies used to evaluate their operations, and that is known as the cash flow statement, or sometimes known as a statement of cash flows. This statement looks at the inflows and outflows of a business's cash and reports that reports that on its own separate statement, this is different than an income statement. Because sometimes there are timing differences between when cash is received versus when cash goes out the door. We learned in another lesson lesson the difference between a cruel and cash basis accounting. And that is why these changes are highlighted on another statement. Sometimes there are estimates that are used in items that make up the income statement but have no impact on the cash flow statement. In fact, many investors like to use the cash flow statement as opposed to an income statement to discern the results of a businesses operation. After all, there are assumptions and estimates that can skew the results of an income statement. But cash, on the other hand, is not so easy to fake. You can count it. And at the end of the day, you either have it or you don't. It is easily verifiable, and the cash flow statement will tell you what happened to it over the course of a month, a year, etcetera, and whether it went up and down and tell you why. The cash flow statement will look at inflows and outflows of cash and categorize them into three separate components or categories. Number one would look at the operating activities. This comes from the sale of goods or services payments to employees money from customers, etcetera number two. It will also separate him out into investing activities. This comes from the sale of purchases, sale or purchase of stocks or bonds. Real estate when you buy equipment when you buy trucks etcetera, so those are investing activities. Number three financing activities. This is money that comes from taking out loans, sale of company stock to investors paying dividends, paying back bank loans, etcetera. And there are a couple of ways you can prepare the statement of cash flows, either using a direct method or an indirect method. The direct method is easier to understand but harder to implement for large organizations. You take the cash flows from operating, investing and financing activity. Then you have your change in cash. The indirect method, which is more commonly use, starts out with net income, which companies track anyway. They take the net income from the income statement and then they back out the non cash items to leave you with the change in cash. But just remember, at the end of the day, the purpose of this statement is the highlight. Why cash changed and by how much. He started the year with 10,000 in your bank account. And then at the end of the year, you ended up with 15,000 in the account. We know there is a change. A good change of $5000 in cash went up $5000. The cash flow statement will tell us if this 5000 came from the operations of the business . Or perhaps you made a killing on selling cannabis stock and that whole 5000 came in from the sale of stock. Or perhaps you sold some equity to investors and brought in $5000 that way. So that will finish off the discussion on the statement of cash flows and conclude our lessons on the various financial statements used by organizations. Thank you very much. 6. Skillshare Bonus Final Lesson: Hi, this is Larry Aiello. I want to thank you for taking my course. I hope it was helpful for you. If you'd be so kind to leave an honest review, it would be greatly appreciated. Also, want to tell you about some of my other courses that I have for small business owners and entrepreneurs? I have a course on launching, getting started for a business. The first step that you need to be concerned with. And I also have a course on insurance with type of insurance that you'll need for your small business. S E O. Search engine optimization is also one of my other courses. Instead of starting a business, you may be considering purchasing an existing business or an online business. I have a course that goes over that and also have a course about payroll considerations for new business owners and what you need to worry about paying your employees or independent contractors will go over both aspects of that. And finally, I have an introductory course on learning Italian. So once again, thank you for taking my courses. And please check out my other courses on this platform. Thank you.