Financial Statements 101

Financial Statements 101

 

LUTZ BUSINESS INSIGHTS

 

Financial Statements 101

financial statements 101

aimee trumbull, audit manager

 

Whether you are looking to purchase a business, sell a business, or ensure your current business maintains its financial health, financial statements are key to making the right decisions. Ideally, a company should prepare financial statements monthly, quarterly, and annually. There are four main components to a financial statement: (1) the balance sheet; (2) the income statement; (3) the statement of owner’s equity; and (4) the statement of cash flows. Often times, footnotes will be prepared along with the financial statements at year-end to provide more detail on the company’s financial results. What do these statements and footnotes reveal? Why should they be analyzed? We answer all of your questions in this blog.

 

BALANCE SHEET

The balance sheet is arguably the most important financial statement of all. It allows you to clearly see your financial position at a particular point in time. For example, you can see where you sit financially at month-end, quarter-end,  and year-end, and whether your financial position is sufficient to fund future operations.

The balance sheet consists of assets, liabilities, and equity, and must always balance. The equation for the balance sheet is: Assets – Liabilities = Equity (or net worth). The balance sheet also distinguishes between long-term and short-term assets and liabilities. Appropriately distinguishing between long-term and short-term is key, as it allows users of the financial statements to determine whether the company has sufficient short-term assets to fund its short-term obligations. For example, if the majority of a company’s assets consist of property and equipment used for operations (long-term assets), it is unlikely these assets can be liquidated to pay short-term debt and/or other liabilities. On the other hand, if the company has a large amount of cash on hand and minimal short-term obligations, it might be time to consider investing the excess cash in assets that will provide a return for the company.

A company’s equity, or net worth, primarily consists of Retained Earnings + Contributions – Distributions. Retained earnings are the accumulation of a company’s earnings and losses since its inception. In general, positive equity represents that a company has been profitable over time and/or there has been a large amount of capital contributions. Negative equity, or a deficit, typically implies that a company has incurred continued losses and/or that its owners are taking distributions that are too large. There are situations where a deficit may be reasonable, particularly in regard to start-up companies; however, a continued deficit over time may raise questions as to whether the company is sustainable.

Statement of Owner’s Equity

The statement of owner’s equity breaks down the details of a company’s equity balance, which is summarized on the balance sheet. Depending on the type of entity, the statement of owner’s equity will show common stock, additional paid in capital (money contributed by owners of the company), retained earnings, and distributions. The details of the statement of owner’s equity can provide insight as to why a company’s net worth may be increasing or decreasing. For example, a company may be recording income each year, but finds that its net worth is decreasing. In this scenario, the statement of owner’s equity will likely prove that the company’s distributions are exceeding income resulting in a net decrease in equity.

The most important thing to remember about a company’s equity balance is that it must always roll from year-to-year. In short, this means that the prior year’s ending equity must equal the current year’s ending equity.

 

INCOME STATEMENT

The income statement, in contrast to the balance sheet, provides a picture of a company’s performance over a specific time period. The income statement can be used for benchmarking, pricing, fixed and variable costs, and break-even calculations. Similar to the balance sheet, income statements should be run monthly, quarterly, and annually. This way, a company can compare how it has performed throughout the year and analyze any large fluctuations. The income statement consists of sales, cost of sales, operating expenses, and other income and expenses that make up a company’s final net income or loss for the period. Below is a brief description of each component:

  • Sales- Represents revenues a company has made from its operations (for example, hauling a load for a trucking company)
  • Cost of Sales- Represents the cost a company incurs to generate a sale (for example, truck driver wages and fuel.)
  • Operating Expenses- Expenses incurred by a company regardless of whether sales are generated (for example, rent, office supplies, utilities, salary of the bookkeeper, etc.)
    • * If you are unsure whether an expense should be categorized as cost of sales or as an operating expense, ask yourself the following questions: “Is the expense dependent on making a sale? Or does the expense amount fluctuate based on the volume of sales?” If the answers to these questions are no, it is likely an operating expense. If a trucking company were to produce no revenue for a week, there would be no fuel expense and no driver wages; however, the company would still have to pay its rent, utilities, bookkeeper, etc.
  • Other Income and Expense- These amounts all relate to non-operating expenses of the Company such as interest income or expense, insurance proceeds, investment income, etc. Non-operating income and expenses are transactions that are not part of day to day business operations. For example, if a trucking company sells one of its old trailers, the gain from the sale of the trailer would be recorded in other income because the company is in the business of transporting goods not selling equipment.

Properly categorizing income and expenses in the income statement allows companies to make better business decisions. Gross margin, which is calculated as sales minus cost of sales, allows a company to see how much revenue is left after considering the cost it took to make a sale. If gross margin as a percentage of total revenue is declining, then it might be time to review specific components of cost of sales. Such components might include supplier contracts, labor hours versus production, fuel costs, etc. On the other hand, if a company finds that its margins are strong, but its net income is declining, it is time to perform a review of operating expenses. If income and expenses are consistently categorized in the correct buckets, it is much easier to identify fluctuations and ensure the proper steps are taken to keep the company’s margins and net income going in the right direction.

 

STATEMENT OF CASH FLOW

The statement of cash flow reveals changes in cash from one period to another.  It is key to remember that income is opinion, and cash is fact, when running a business. Although your income statement might show an increase in revenue, if the majority of that revenue is sitting in accounts receivable and not getting paid, the company may appear to be performing well financially, but it is actually strapped for cash.

There are three components to the statement of cash flow: (1) operating activities; (2) investing activities; and (3) financing activities. 

Operating Activities

Operating activities refer to any cash generated from business operations, such as selling products or services. Reductions in operating cash flow may include purchasing inventory, paying suppliers, or an increase outstanding customer balances. Typically, operating cash flow should be higher than or equal to net income.

Investing Activities

Investing activities show how a company is investing in its future. Cash used to purchase fixed assets and investments will appear as a reduction in cash flow. Similarly, the sale of fixed assets or investments will appear as an increase in cash flow for the reporting period. 

Financing Activities

Financing activities include all cash transactions related to owners and creditors. When a company takes out a loan, this represents an increase on the cash flow statement as the company is receiving cash. As the company pays back the loan it will result in a decrease in the cash flow statement. The financing section also includes distributions to owners (decrease in cash) and capital contributions (increase in cash).

The sum of the operating, investing, and financing sections represents the increase or decrease in the company’s cash balance over the period being presented. If a company finds its net income is increasing and cash is decreasing, the statement of cash flows may help identify the reason why. It could be possible that the company is paying its suppliers and employees every two weeks, but only receiving payment from customers every month. This results in a two-week delay of the inflow of cash compared to the outflow.

 

FINANCIAL STATEMENT FOOTNOTES

Footnotes to financial statements are a cheat sheet to a company and provide additional details about performance, accounting policies, commitments and contingencies, ongoing litigation, subsequent events, and any other information considered to be material to the financial statements.  

 

WHY FINANCIAL STATEMENTS SHOULD BE EVALUATED

If you want a clear picture of financial health, you need financial statements. Financial statements are evaluated to make informed decisions internally and externally. Internally, these statements are used for performance evaluation, planning, and management analysis. Externally, multiple parties rely on this information. Investors need proof they are making sound investments, lenders need to know a business can repay its loan. Other third parties include suppliers, regulators, and sometimes even customers.  

Although financial statements are necessary, they can be complex. If you need help analyzing your financial statements, or even getting them started, contact Lutz today.

ABOUT THE AUTHOR

402.827.2314

atrumbull@lutz.us

LINKEDIN

AIMEE TRUMBULL + AUDIT MANAGER

Aimee Trumbull is an Audit Manager at Lutz with over five years of assurance experience. She is responsible for providing assurance and consulting services to clients with a focus on the agriculture, real estate, services and manufacturing industries. In addition, she assists with transaction advisory services.

AREAS OF FOCUS
  • Audit
  • Assurance
  • Consulting
  • Transaction Advisory Services
  • Agriculture Industry
  • Real Estate Industry
  • Services Industry
  • Manufacturing Industry
  • Employee Benefit Plans
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Certified Public Accountant
EDUCATIONAL BACKGROUND
  • BS in Accounting, University of Nebraska, Lincoln, NE
COMMUNITY SERVICE
  • Teammates, Mentor

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OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Lutz Announces Partnership with Bryan Health Connect

Lutz Announces Partnership with Bryan Health Connect

 

LUTZ BUSINESS INSIGHTS

 

Lutz announces partnership with bryan health connect

Lutz, a Nebraska-based business solutions firm, is excited to announce their preferred business partnership with Bryan Health Connect. Through this alliance, Lutz’s specialized accounting and healthcare consulting groups will offer an array of services to Nebraska hospitals and healthcare providers including outsourced accounting, chargemaster reviews, coding and billing, internal control assessments, and more.

“Lutz is proud to be a preferred partner of Bryan Health Connect. Our team is committed to providing high-quality, reliable healthcare accounting and consulting solutions. Together, we promise to “mind what matters” by simplifying complexities and sparking the right solutions to help you thrive.” said Lutz Consulting Shareholder, Susie Krause.

Bryan Health Connect is Bryan Health Connect is a physician-led, physician-hospital organization (PHO), who supports its members with services to improve practice efficiency, enhance quality of care and build practice and hospital/facility services. They work closely with physician practices, facilities and hospitals to help maintain independence in a changing health care environment. Bryan Health Connect offers a broad, clinically and financially integrated, high-quality, cost-effective network of providers.

Kim Larson, Member Services Coordinator at Bryan Health Connect said, “Our partnership with Lutz will allow us to continue to work closely with our members, helping them maintain independence in an ever-changing health care environment, and supporting them with services that add value to their membership by expanding our offerings of specialized healthcare services and education. We look forward to working with their team, whose expert knowledge and support will benefit our members.”

For more information on Lutz’s services, visit https://www.lutz.us/bryan-health-connect/. For more information on Bryan Health Connect, visit bryanhealth.com/bryan-health-connect/.

RECENT POSTS

Financial Statements 101

Financial Statements 101

Whether you are looking to purchase a business, sell a business, or ensure your current business maintains its financial health, financial statements are key to making the right…

read more

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Toll-Free: 866.577.0780  |  Privacy Policy

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OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Nebraska Taxation of Military Retirement Pay

Nebraska Taxation of Military Retirement Pay

 

LUTZ BUSINESS INSIGHTS

 

nebraska taxation of military retirement pay

Russ smith, tax & consulting director

 

Beginning with tax year 2022, Nebraska will allow an exclusion of 50% of military retirement pay from Nebraska taxable income.  This change is the result of LB 153, enacted by the 2020 Nebraska Legislature.  Previously, a partial exclusion was available beginning with tax year 2015, but only if an election to exclude income was timely filed. 

Military retirement pay is defined as retirement benefits that are periodic payments attributable to service in the uniformed services of the U.S. for personal services performed by an individual prior to his or her retirement.  

Military retirement pay does not include annuity payments to a spouse, former spouse, or child that are based on an individual’s military services; nor does it include payments received by a former spouse of a retired military member under a final decree of divorce, dissolution, annulment, or legal separation or a courtordered, ratified or approved property settlement pursuant to a decree dividing military retirement pay. 

Law in effect for tax years 2015 through 2021 

For tax years 2015 through 2021, an individual may make a one-time election to exclude a portion of military retirement pay from Nebraska taxable income.  The election must be made within two calendar years from the date of retirement from the military.  The election options are: 

  1. Exclude 40% of military retirement pay for seven consecutive tax years beginning with the year the election is made;  OR 
  2. Exclude 15% of military retirement pay for all tax years beginning with the year in which he or she turns sixty-seven years old. 

 The election is made on Form 1040N-MIL. 

It is important to note that the election MUST be made within two calendar years of retirement from the military, regardless of your state of residency at the time of retirement.  If you were a nonresident of Nebraska at the time of retirement, then later moved to Nebraska, you still must have made the election within two calendar years of retiring from the military.  Also, the two-year election deadline is based on the date of retirement, not the date when you begin receiving military retirement pay. 

Failure to timely make an election will result in the full amount of military retirement pay being included in Nebraska taxable income (to the extent included in federal adjusted gross income).   

New law beginning tax year 2022 

Beginning with tax year 2022, 50% of military retirement pay will be excluded from Nebraska taxable income (to the extent included in federal adjusted gross income).  No formal election will be required, and you will no longer be limited by an election filed (or not filed) under the previous law. 

To learn more about Nebraska’s taxation of military retirement paycontact Russ Smith at Lutz at 4028272312. 

 

ABOUT THE AUTHOR

402.827.2312

rsmith@lutz.us

LINKEDIN

RUSS SMITH + TAX & CONSULTING DIRECTOR

Russ Smith is a Tax & Consulting Director at Lutz with over 20 years of state tax experience. He specializes in state income tax planning and compliance and helps clients minimize state and local taxes through the use of incentives.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Kearney, NE
  • Graduate Studies, University of Nebraska, Lincoln, NE
COMMUNITY SERVICE
  • Douglas County Historical Society, Board Member
  • Douglas County Historical Society Foundation, Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Nebraska Microenterprise Tax Credit

Nebraska Microenterprise Tax Credit

 

LUTZ BUSINESS INSIGHTS

 

Nebraska Microenterprise Tax Credit

nebraska microenterprise tax credit

russ smith, tax & consulting director

 

Do you own a Nebraska based small business? By small business, we mean five or fewer full-time equivalent employees. If so, you may be eligible for Nebraska’s Microenterprise Tax Credit.

The Microenterprise Tax Credit is available to individuals who are actively engaged daily in the management and operation of a microenterprise. A microenterprise can be any industry or entity type located in Nebraska that has five or fewer full-time equivalents at the time a Microenterprise Tax Credit application is filed.

APPLICANTS & RELATED PERSONS

Approved applicants are eligible for a refundable Nebraska income tax credit of up to 20% of the increase in investment and/or employment at the business compared to base year levels. The maximum credit allowed is $10,000.

The $10,000 cap is a lifetime cap for the applicant and related persons. Related persons include those defined under the Internal Revenue Code as a co-owner of the business, as well as a spouse, parent, son, daughter, brother, or sister of the applicant, even if they earned credits unrelated to your business.

DETERMINING GROWTH

The base year for determining growth is the year before the application is filed. Investment growth is based on an increase in purchases over a two-year period compared with base year purchases. Eligible investments include purchases of depreciable assets, repairs and maintenance, advertising, legal and professional fees, and leases. 

Employment growth is based on the increase in compensation (including employer health insurance contributions) over a two-year period compared with base year compensation. Compensation paid in excess of 150% of the Nebraska average weekly wage ($1,335 per week for 2020) is excluded from the employment growth calculation.

If you think the Microenterprise Tax Credit may apply to you, and you have experienced or expect to experience employment and/or investment increases over the next two years, then you may want to consider filing a Microenterprise Tax Credit application. Under current law, 2022 is the last year that Microenterprise Tax Credit applications can be filed.

To learn more about the Microenterprise Tax Credit, contact Russ Smith at Lutz at 402-827-2312.

ABOUT THE AUTHOR

402.827.2312

rsmith@lutz.us

LINKEDIN

RUSS SMITH + TAX & CONSULTING DIRECTOR

Russ Smith is a Tax & Consulting Director at Lutz with over 20 years of state tax experience. He specializes in state income tax planning and compliance and helps clients minimize state and local taxes through the use of incentives.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Kearney, NE
  • Graduate Studies, University of Nebraska, Lincoln, NE
COMMUNITY SERVICE
  • Douglas County Historical Society, Board Member
  • Douglas County Historical Society Foundation, Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

5 Ways Automated Accounting Software Can Save Your Business Money

5 Ways Automated Accounting Software Can Save Your Business Money

 

LUTZ BUSINESS INSIGHTS

 

5 Ways Automated Accounting Software Can Save Your Business Money

5 ways automated accounting software can save your business money

lauren harris, senior accountant

 

If you’re like many small businesses, you’ve probably gotten creative in response to the economic hardship caused by the COVID-19 pandemic. You may be finding ways to reduce your expenses out of absolute necessity – not simply because it increases your profits.

Accounting software can help you save money in ways you might not have considered. By switching from a paper to an automated system, your business can:

1. Reduce errors

When you use software like QuickBooks, your accounting accuracy improves dramatically. Because all of your records and transactions are organized and easy to access, you’re far less likely to make mistakes that can lead to supplier late fees, tax penalties, and even lost customers.

2. Budget wisely

You know you should have a budget, but it can be hard to predict your income and expenses – especially these days. QuickBooks comes with specialized tools that can help you finally complete this challenging task. You could even start with your current income and expenses and build a budget based on this real-life data. When you’re deciding where to spend your money, you’re less likely to make a purchase that will force you to cut back elsewhere. A budget guides you in making important spending decisions.

3. Track your inventory

You’re probably familiar with the problems that poorly managed stock can cause. If you’ve ordered too much of an item that isn’t selling, you have too much money tied up in unsold inventory. On the other hand, if you’re not reordering in time to fulfill all of your orders, you lose sales. When you automate your inventory management, you can tell at a glance where you stand with your stock.

4. Simplify your payroll

When you lose time, you lose money, and there’s no other accounting task that can eat up more hours than payroll. When you automate this process, you enter information about your employee and contractor compensation, payroll tax requirements, and benefits – once. All you have to do in preparation for each payday is enter the hours worked and make any necessary adjustments for items such as miscellaneous deductions and reimbursements. Payroll software handles all of the complex calculations for payroll taxes and retirement plan benefits. It can even submit your payroll tax deposits and tax filings on time, automatically.

5. Run pre-built reports

How long would it take you to create an accounts receivable aging report or a profit and loss statement based on your paper records? This is difficult and time-consuming to accomplish, even in Excel or Google Sheets. QuickBooks comes with dozens of pre-designed templates for real-time reports that provide detailed breakdowns of your revenue and spending. You just open a report, change the dates, and add any other desired filters, and the report appears.

No business wants to spend more than it has to on its operational costs, and accounting is clearly an area where you can save money by automating. If you don’t know where to start, contact us. We can get you set up with accounting software and provide training and ongoing support.

ABOUT THE AUTHOR

402.514.0012

lharris@lutz.us

LINKEDIN

LAUREN HARRIS + SENIOR ACCOUNTANT

Lauren Harris is a Senior Accountant in the Client Accounting Services department at Lutz with over four years of related experience. She specializes in providing payroll tax reporting and compliance, software training and support, and outsourced accounting assistance to small businesses.

AREAS OF FOCUS
  • QuickBooks Training & Support
  • Outsourced Accounting
  • Payroll Tax Reporting and Compliance
AFFILIATIONS AND CREDENTIALS
  • Certified Public Accountant
EDUCATIONAL BACKGROUND
  • BSBA in Finance and Accounting, University of Nebraska, Omaha, NE
COMMUNITY SERVICE
  • Midwest YouCan Foundation, Treasurer

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Does Your Restaurant Use a Food Delivery Service?

Does Your Restaurant Use a Food Delivery Service?

 

LUTZ BUSINESS INSIGHTS

 

Does Your Restaurant Use a Food Delivery Service?

DOES YOUR RESTAURANT USE A FOOD DELIVERY SERVICE?

If you use a food delivery service such as Grubhub, Postmates, Uber Eats, etc., you may owe tax on those sales. Some delivery services collect all sales tax & city occupation tax (if applicable), and remit it to the proper taxing authorities. Other delivery services collect the customer’s tax, but then give the tax to the restaurant to remit to the proper authorities.

We have recently found the tax treatments vary substantially between providers and can change frequently. It is important to read the fine print and discuss the tax reporting details with your food delivery service provider(s) regularly. If you have any questions regarding this topic, please contact us.

 

RECENT POSTS

Financial Statements 101

Financial Statements 101

Whether you are looking to purchase a business, sell a business, or ensure your current business maintains its financial health, financial statements are key to making the right…

read more

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850