Notes to Financial Statements - Complete Example



Sales Forecasts:
The following financial projections use the number of corporate sponsors as a reference point in determining forecasted sales. The following sales objectives (in # of corporate sponsors) are anticipated to be reached during 200X and 200Y.

200X 200Y
Forecasted Sales Revenue $138,000 $175,000


Marketing & Promotional Expenses:
The marketing budgets for 200X and 200Y are summarized below:

Item: 200X
Print Advertising $ 2,500 $ 5,000
Promotional Kits & Development $12,784 $14,062
Distribution Costs $ 500 $ 600

Totals $15,784 $19,662


The 200X marketing & promotional items are paid for in the following months:

Item: Months Paid Amount Disbursed

Print Advertising March, April $1,250/month
Promotional Kits March, April $5,686/month
Distribution Costs May, June, July, Sept, November $ 100 /month
Consultation March, June, July, September $ 353 /month


Management & Staffing:
The number of employees required by The Internet Company and their respective wage rates per week are summarized below. Please Note: employer costs are forecasted at 11% of gross salary.

# of employees 200X
Management 1 $15,600 $20,800
Administrative Staff Needed 1 $19,200 $26,000
Internet Specialist Required 1 $19,200 $26,000


Accounts Receivable:
The company assumes a 30 day collection period from the date a sale is made. To be objective the company is assuming that 4% of all sales will be uncollectible and therefore considered a bad debt expense. The contra account to debt expense is the allowance for doubtful account which appears on the company's balance sheet. Prior years' uncollectible accounts receivable are written off in the following year, thus assuming all bad debts are unrecoverable. The bad debt expense, allowance for doubtful account, and the company's Net Accounts Receivable at the end of each year are as follows:

Bad Debt Expense $ 5,420 $ 7,000
Allowance for Doubtful Account $ 5,420 $ 7,000
Net Accounts Receivable $14,746 $15,120


Office Supplies:
The Internet Company employed the materiality principal, as it relates to office supplies, by expensing 100% of the office supplies purchased through 200X and 200Y. The following dollar cost of office supplies will be purchased three times per year and appear on the income statement as an office supplies expense:

Office supplies Expense $ 1,200 $ 2,400


The company is not required to carry any inventory due to the nature of the proposed business. As a result, a "cost of goods sold" account, will not be used since the product being delivered is information and not a tangible raw material.

Capital Assets:
All capital items are assumed to have a useful life of four (4) years and therefore are depreciated over that time frame. The forecasted financial statements do not separately categorize each capital asset, rather they depict an NET asset pool. The asset pool balance is depreciated over the four (4) year duration. All capital assets are considered fixed assets and are recorded at their historical cost. Below depicts the existing and anticipated purchases of capital assets for 200X and 200Y.

Capital Assets for Depreciation / year

Office Equipment $18,850 $0.00 $4,713 $4,713


Accounts Payable:
For financial statement simplicity, the company will not delays payment by 30 days to general vendors offering this line of credit. (Immateriality Principal). Delays are considered, however, for all capital asset purchases and all marketing expenditures, since such transactions have a material affect on the company's cash flow.

Taxes Payable:
Corporate taxes are paid in March of the following year and are estimated to be 25% of Net Income before Taxes.

Sales Taxes:
For simplicity, sales taxes are not included in the forecasted financial statements. The exclusion of sales taxes do not affect the integrity of the forecasted financial statements, since the company would simply collect the tax from each customer (from each sale made) and remit it to the government.

Loan from Investor:
A interest bearing loan from an investor is shown on the company's December 31, 200W balance sheet. The $ 5,000 was received in November of 200W and will be paid back in November of 200X. This activity can be seen in the company's forecasted cash flow statement. An option of converting this debt financing into equity financing can be exercised at the discretion of management upon maturity.

The New Entrepreneurship Loan Program:
The New Entrepreneurship Loan Program is a loan program, administered through the state government. Its purpose is to assist entrepreneurs in the developmental stages of their businesses by providing a maximum of loan of $15,000. The interest rate applied to this loan is set at 1% above the prime rate. Therefore, The Internet Company's forecasted financial statements depict an interest rate of 6%.

The New Entrepreneurship Loan Program provides an interest rebate after the first year on the amount paid out in interest. This interest rebate of $821 will reduce the outstanding loan balance by the same amount. To be objective, we have elected not to account for the rebate in the forecasted financial statements. Below depicts the loan's account balance at each year end.

Dec. 31, 200X Dec. 31, 200Y
Historical Value of Loan $15,000 $15,000
Principal Payments made on Loan $ 2,659 $ 5,475
Outstanding Balance at year end $12,341 $ 9,525


Contributed Capital Account:
This account shows a balance of $18,796 which consists of $4,000 of computer equipment and the remaining being cash investments. This remaining cash investment was used to absorb the development costs incurred throughout 200W.

Retained Earnings:
The retained earnings account balances as of December 31, 200W, 200W and 200Y have been calculated as follows:

Beginning Retained Earnings $0.00 $(19,918) $ 84
Add: Net Income After Taxes $(19,918) $ 22,225 $24,185
Less: Dividends Issued $0.00 $ 2,222 $ 2,418
Equals: Ending Retained Earnings $(19,918) $ 84 $21,851

Note: the company has been in its development stage since January 200W. See 200W statements for ACTUAL activities. Moreover, the 200W income statement and 200W balance sheet are actual figures. The 200X and 200Y figures, however, are forecasted.

Common Shares Account:
The company has recently acquired a shareholder that will invest $15,000 into the business venture. Under the agreement, Brian Smith will receive payment of $5,000 personally while the remaining $10,000 will be invested into the organization. The company will receive $5,000 in January of 200X and the remaining $5,000 is scheduled for March.