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CHAPTER 10

1. What is the importance of developing and maintaining financial records in a franchised


business?
(what is the definition of financial records, think of all transaction information, whether it be in
paper or electronic format, that involves your money or investments as a financial record.
For example, this can mean paychecks you receive, investments you make such as CDs, stocks,
bonds or annuities. Your retirement plans and even checking and savings bank records also involve
you and your money—past, current, and future, so they are also considered financial records.
Some records that have no cash value currently such as life insurance policies or short or long-
term disability policies. These are also financial records that are important to keep.)
Textbook: Financial records are basic to any business, including franchised ones. Financial records
are where all the financial information of the franchise is kept, including how money, assets, and
resources are measured and their flow through the company is recorded. Moreover, they show the
financial flow of the franchised business, which is written documentation or recording of busness
transactions shown through financial statements. Financial records are important to develop and
maintain because they prove how healthy a franchised business is; and they provide owners and
managers with the information oftern necessary for making appropriate business decisions that fit
financial performances.

Internet: Everyone in business must keep records. Keeping good records is very important to your
business. Good records will help you do the following:
 Monitor the progress of your business
 Prepare your financial statements
 Identify sources of your income
 Keep track of your deductible expenses
 Keep track of your basis in property
 Prepare your tax returns
 Support items reported on your tax returns
Monitor the progress of your business
You need good records to monitor the progress of your business. Records can show whether your
business is improving, which items are selling, or what changes you need to make. Good records
can increase the likelihood of business success.
Prepare your financial statements
You need good records to prepare accurate financial statements. These include income (profit and
loss) statements and balance sheets. These statements can help you in dealing with your bank or
creditors and help you manage your business.
 An income statement shows the income and expenses of the business for a given period of
time.
 A balance sheet shows the assets, liabilities, and your equity in the business on a given date.
Identify sources of your income
You will receive money or property from many sources. Your records can identify the sources of
your income. You need this information to separate business from nonbusiness receipts and
taxable from nontaxable income.
Keep track of your deductible expenses
Unless you record them when they occur, you may forget expenses when you prepare your tax
return.
Keep track of your basis in property
Your basis is the amount of your investment in property for tax purposes. You will use the basis
to figure the gain or loss on the sale, exchange, or other disposition of property, as well as
deductions for depreciation, amortization, depletion, and casualty losses.
Prepare your tax return
You need good records to prepare your tax returns. These records must support the income,
expenses, and credits you report. Generally, these are the same records you use to monitor your
business and prepare your financial statement.
Support items reported on your tax returns
You must keep your business records available at all times for inspection by the IRS. If the IRS
examines any of your tax returns, you may be asked to explain the items reported. A complete set
of records will speed up the examination.

2. What is the importance and use of a balance sheet? What are its primary components?
10-4 p. 269
The balance sheet provides a picture of the financial health of a business at a given moment in
time — usually the end of a month or financial year. It can tell you if you owe more money than
what you currently have, the current value of your assets and the overall value of your business.
More importantly, if you familiarise yourself with using financial ratios, the balance sheet can
provide warning signs so you can solve any problems before they destroy your business. The
balance sheet is a vital financial statement you should be reviewing regularly, as it changes with
every transaction.

Components: tham khảo sách cộng với phần dưới này

 Assets: everything of value that the company owns


o Current Assets – Can be converted into cash within one year – Cash, Receivables, Inventory,
etc.
o Fixed Assets – Permanent in nature – Land, Buildings, Machinery, Equipment, etc.
o Other Assets – Intangibles such as Patents and Goodwill
o Total Assets – Total of all above Assets
 Liabilities: All the debts that the company owes
o Current Liabilities – Debts due within one year from date of Balance Sheet – Payables, Loans
etc.
o Long Term Liabilities – Debts due more than one year from date of Balance Sheet – Loans,
etc.
o Total Liabilities – Total of all above Liabilities
 Net Worth: Assets minus Liabilities – book value of the company
o Owner’s Equity Investment – Owner’s investment (cash & equipment) in the company
o Retained Earnings – Prior years’ Net Profits/(Net Losses) “retained” in the business
o Net Profit – Current year’s Net Profits (or Net Loss)
 Total Net Worth – Total of all above Net Worth accounts (Total Owner’s Equity)
 Total Liabilities and Net Worth – Adds to the same amount as Total Assets; therefore Assets
are in “balance” with the total of Liabilities and Net Worth.

3. Describe the importance and use of an income statement. What are its primary
components?
10-3 p. 267
Tham Khảo:

The Income Statement is a direct result of the information that is recorded in the journals
and ledgers, and then transformed into concise, compiled revenue and expense figures. It is
usually prepared directly from the monthly "closing of the books" and provides an accurate
picture of the revenue and expense of the business for a specified period of time; usually a
month, quarter or year. The Income statement is used by management within the company, but
also by investors and creditors outside the company to evaluate profitability, performance and
aid in the assessment of risk for the investor or creditor.

The Income Statement is divided into three parts: Total revenues, total expenses, and net
income. The first section listed on the Income Statement is the Total Revenues reported for the
particular period of time reported. Other than revenues generated from the normal operations of
business, there are other sources of revenue that must also be included in the "Total Revenue"
area. Rent and Interest Revenue would be included at this point. Next, you have the section
known as "Total Expenses". This section includes all expenses incurred in the direct operation
of the business. The most common forms of expense include wages, salaries, rents, utilities,
insurance and supplies. Almost every business has an inclusion of variable expenses that is
lumped into one category known as "miscellaneous expense"; these expenses are generally listed
from largest to smallest, with miscellaneous always being the last expense reported, no matter
how large or small. Finally, the entry known as "Net Income" is a result of the subtraction of the
total expenses from the total revenues.

The Net Income that is reported on the Income Statement is then transferred to the Statement of
Owner's Equity, and incorporated further into the information that is made available through the
Financial Statements.
Important because
The income statement is important because it shows the profitability of a company during the time
interval specified in its heading. The period of time that the statement covers is chosen by the
business and will vary.
People pay attention to the profitability of a company for many reasons. For example, if a company
was not able to operate profitably—the bottom line of the income statement indicates a net loss—
a banker/lender/creditor may be hesitant to extend additional credit to the company. On the other
hand, a company that has operated profitably—the bottom line of the income statement indicates
a net income—demonstrated its ability to use borrowed and invested funds in a successful manner.
A company's ability to operate profitably is important to current lenders and investors, potential
lenders and investors, company management, competitors, government agencies, labor unions, and
others.