Title: Explain the purpose of income/profit and loss statements, cash-flow statements, balance sheets, and startup costs.
Course: Entrepreneurship (12053-I) > Section: Understanding Financial Statements

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
  - identify which line items are expenses and which are revenue
  - 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 or if its expenses exceed its revenue.

- Balance sheets
  - statements of the assets, liabilities, and capital of a business at a particular point in time
  - detail the balance of income and expenditure over the preceding period.

- Startup costs
  - finances needed before initiating a venture
  - 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, or P&L, statement?
- How are income, or P&L, 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? What are other uses for data in cash-flow statements?
- 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?
- Why must a balance sheet balance?
- What are viable options for obtaining funding to cover startup costs?
- Which financial statements can be used to forecast sales?
- What is the difference between accounting and finance?

Teacher Resources:

- DECA Competitive Event: Start-Up Business Plan
- FBLA Competitive Event: Business Plan
- Expenses and Cost - How to Spend Money Wisely, Entrepreneurship Crash Course
- Understanding Financial Statements and Accounting, Entrepreneurship Crash Course