Welcome to Financial Series #2The Balance Sheet

Your Hosts for Today’s Conference are:Gary Elekes in Nashville, Tennessee

Gary Oetker in Plano, Texas

Conference Objectives: Review Balance Sheet fundamentals.

Review the key components of the Balance Sheet and the critical information needed to manage a company.

Review how inventory, depreciation, warranty reserve and service agreement reserve transactions affect Balance Sheet

Review the basic layout and terminology of the Balance Sheet Review the Balance Sheet equationReview depreciation transactionsReview inventory transactionsReview warranty reserve transactionsReview service agreement reserve transactionsReview key points in using the Balance Sheet as

a tool to manage company performance

Agenda for Conference

AssetsCurrent AssetsFixed AssetsLiabilitiesCurrent LiabilitiesLong-Term LiabilitiesNet Worth (Owner’s Equity)

Beginning Terminology

Basic Equation:

ASSETS = LIABILITIES + NET WORTH

Or

ASSETS - LIABILITIES = NET WORTH

The Balance Sheet

Balance Sheet Example

Cash $20,000 Liabilites $15,000

Truck $20,000 Owner's Investment $25,000

TOTAL ASSETS $40,000 TOTAL LIABILITIES $40,000& NET WORTH

ASSETS LIABILITIES & NET WORTH

Current Asset AccountsCash

Accounts Receivable

Notes Receivable

Inventory

Work In Process

Prepaid Expenses

Other Current Assets

Fixed AssetsProperty, Plant & Equipment

Vehicles

Improvements on Leased Building

Less: Accumulated Depreciation

Balance Sheet FormatCurrent LiabilitiesAccounts PayableNotes PayableCurrent Portion of Long-Term DebtAccrued ExpendituresReserve AccountsCustomer DepositsOther Current Liabilities

Long Term LiabilitiesMortgages PayableBonds PayableLong Term Notes Payable

Stockholder Equity Capital StockRetained Earnings

Sample Balance Sheet Dollars %

Assets: Current Assets Cash $ 36,900 7% Accounts Receivable $ 308,250 63% Notes receivable $ - 0% Inventory $ 43,800 9% Prepaid Expenses $ 3,100 1% Other Current Assets $ 12,500 3% Total Current Assets $ 404,550 82%

Fixed Assets Plant & Equipment $ 61,700 Machinery $ 70,000 Less: Accumulated Depreciation $ (54,230) Net Fixed Assets $ 77,470 16%

Other Assets $ 10,000 2%

Total Assets $ 492,020 100%

Sample Balance Sheet (cont.)Liabilities Current Liabilities Accounts Payable $ 55,500 11% Notes Payable $ 71,900 15% Accrued Expenditures $ 2,110 0% Warranty Reserve $ 4,500 1% Other Current Liabilities $ 9,200 2% Total Current Liabilities $ 143,210 29%

Long Term Liabilities $ 38,210 8%

Total Liabilities $ 181,420 37% Net Worth Capital Stock $ 87,500 18% Retained Earnings $ 223,100 45% Total Net Worth $ 310,600 63%

Total Liabilities & Net Worth $ 492,020 100%

Depreciation Inventory Reserve Accounts

Warranty ReserveService Agreement ReserveStart-Up Reserve

Special Balance Sheet Transactions

Depreciation AccountsDepreciation ExpenseAccumulated Depreciation

Depreciation MethodsStraight Line DepreciationAccelerated Depreciation

Depreciation

Depreciation Flow Example

Company Purchases

Truck

At The End Of The YearPart Of The Trucks Useful

Life Is Over

At The End Of The YearThe Income Statement

Includes Annual Depreciation

Expense Of Truck

Inventory Flow ExampleEquipment Is Purchased ForWarehouse

The Cost IsPlaced IntoThe InventoryAccount

Equipment Is Then Used On A Job

The Cost Is TransferredTo Cost Of Sales - Equipment

The Income StatementShows Revenue ForJob And The Cost Of Sale

Recognizes the liability associated with an equipment sale (1 year labor)At the time of sale:

Warranty is a cost of sales line itemGenerally dollar amount is calculated as a

percentage of the saleMoney is transferred to warranty reserve account on

Balance Sheet

Warranty Reserve

When warranty work is performed: Expenses are charged to a warranty labor and a

warranty parts expense accounts.Warranty part credits are credited to the warranty

parts expense account when they’re received.At the end of the month the warranty reserve

account is adjusted to balance the warranty expense accounts. It should be a wash.

Warranty Reserve (cont)

Think of the warranty reserve account as a bucket

If the bucket runs dry, you’re warranty costs are higher than what you planned for. You’ll need to increase the warranty

amount set aside on each job.If you’re warranty costs come in less than expected, the

bucket will be full and overflowing. At the end of the year, you’ll need to make adjustments to recognize this additional

gross margin.

Warranty Reserve (cont)

To determine what the warranty reserve should beTo determine what the service agreement reserve should beTo determine the value of your company To determine how company profits compare to the owner’s investment

The Income Statement focuses on company profitability. The Balance Sheet focuses on the

overall health of the company.

The Balance Sheet provides key financial information for management in terms of financial

ratios.

Using the Balance Sheet

Net Working

Capital

Working Capital

=Current

Assets-

Current

Liabilities

Working Capital should equal 10% of annual salesProfits retained in a company provide the working capital needed for growthA lack of Working Capital can create cash flow problem

Other Financial Ratios are covered in another Coaching Conference

Questions

&

Answers