Balance Sheet

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Balance sheet
Introduction
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The stakeholders of a firm are: Shareholders, creditors, Suppliers, Managers, Employees, tax
authorities.

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Interested in knowing How the firm is doing? And what is its financial condition?

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To understand the financial performance of the firm its shareholders look at three financial
statements:

 The balance sheet
(shows financial condition of firm)
 The profit and loss account
(financial performance of the firm over a period)
 The source and use of fund statement
(flow of funds through the business during a given accounting period)
Is share and stock is same word?
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to clearly define the shares and stock:

I.

stock is the capital raised by a company through the issue of shares

II.

a share is a single unit of stock

Why do shares exist?
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Shares are issued by a company to raise money (capital) to help plan for future
projects or because the owner/s of the company want a big lump sum of money for
themselves as a reward for the hard work they have put into building up the company!

Example:
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Example XYZ owns 100% of Company A (for arguments sake assume he owns all 100/100
shares of company A).

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He then issues shares for his company and decides to sell 40% of the company (40 shares).

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he still owns the company (over 50%) and therefore still gets to make the

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company’s strategic decisions.
Note: XYZ will now only receive
60% of the future profits when the company’s
dividends are paid.
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So “why has Mr XYZ done this?”. The reason

is that by putting a portion of the company
up for sale he would have received a major lump
sum of money when people bought the remaining
40% of shares in his company. This money could
allow him to grow the business or he could even
keep the money for himself to buy a mansion in
southern France!
Why should the public buy shares offered by company A?
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The public would buy the shares in order to reap some of the future profits made by the
company.

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They would receive these profits in the form of dividends.

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The public could also make money by a rise in the price of each share. This is called a capital
gain on their stock.

Example:
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BCD buys 20 shares of company A at $10 each, that’s a total of $200 spent

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Company A keeps expanding and so do its profits. Therefore the demand for shares in
Company A has risen. This means people are now willing to pay $18 per share in Company A

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BCD sells his 20 shares for $18 each. That’s means she collects $360. As a result earning
himself a tidy profit of $160 or 80%!

Share
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Two major types of shares are

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(1) Ordinary shares (common stock), which entitle the shareholder to share in the earnings of the
company as and when they occur, and to vote at the company's annual general meeting and other
official meetings, and
(2) Preference share(preferred stock) which entitle the shareholder to a fixed
periodic income (interest) but generally do not give him or her voting rights.
when dealing with shares in the stock market we will nearly always be dealing with ordinary shares.
Dividend:
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A dividend is a payment made by a corporation to its shareholders, usually as a distribution
of profits.

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When a corporation earns a profit or surplus, it can either re-invest it in the business
(called retained earnings), or it can distribute it to shareholders.

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A corporation may retain a portion of its earnings and pay the remainder as a dividend.

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Distribution to shareholders can be in cash (usually a deposit into a bank account).

What is a stock dividend?
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A stock dividend is the payment a trader receives from the company he/she is currently
investing in.

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The company pays the dividend from the profit it generates throughout its financial year.

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As a result, if the company fails to make a profit, dividends are not likely to be received by the
investor.

Dividend Example
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If you own 200 shares in a company and they cost $10 each ($2,000 total)
-and the company issues a dividend of $0.10
- you will be entitled to a payment of $20! (($2000/$10)x$0.10)

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Note: Dividends are such a good bonus that there are traders who only buy stock before a
particular date and make their money on dividends rather than capital gains.

Why do stock prices move up and down?
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The main reason for movements in a company’s stock price is due to supply and demand.

i.

A share price goes up when…

ii.

A company is making huge profits.

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iii.

Lots of people want to buy the shares to reap the rewards of the profits.

iv.

Not many people want to sell the shares.

v.

There are not many shares left.

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A share price goes down when…

i.

A company makes some losses.

ii.

Lots of people want to sell the shares.

iii.

Not many people want to buy the shares.

iv.

There are too many shares.

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However there are several external factors that affect a company’s stock price.

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One factor that we have all witnessed recently is the recession.

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Others include inflation rates, interest rates, job cuts, natural disasters, company mergers,
changes in company management to name a few…

Creditors:
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A small business can fund its operations using either debt capital from creditors or equity
funding from stockholders.

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While stockholders own a stake in your company and do not require repayment, creditors
have no ownership and must be repaid.

Accounting for Money from Creditors
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A company lists the money it borrows from creditors in the liabilities section of its balance
sheet. Examples of liabilities include bank loans, notes payable and bonds.

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A liability account’s balance represents the claim a creditor has against the company’s assets.

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As a business repays a debt, it reduces the account balance by the amount paid. For example,
if you borrow $20,000 from a bank, you would list a bank loan for $20,000 as a liability. If you
repay $5,000 of it, you would decrease the balance to $15,000.

Interest Expense
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Most creditors require periodic interest payments. Interest represents the cost of borrowed
money and is calculated as a percentage of the outstanding balance. A company reports the
interest that applies to a particular accounting period as an expense on its income statement.
This expense reduces profit.

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For instance, if a creditor charges your small business 10 percent annual interest on a $10,000
loan, you would report $1,000 in interest expense on your annual income statement. The
expense would reduce your profit by $1,000.

Basic concepts in Financial Accounting:

1) Entity Concept:
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For the purpose of accounting, business firm is regarded as a separate entity.

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This concept assumes that, for accounting purposes, the business enterprise and its owners
are two separate independent entities.

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Thus, the business and personal transactions of its owner are separate.

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E.g: if you own a business and pay yourself a salary from the business, you record these
transactions on the financial statements of the business. if on the other hand you invest
available funds in another company or buy into a money market account, this is not shown
because there is no affect on the financial status of the business.

2) Money Measurement:
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Accounting concerned with only those facts which can be expressed in monetary terms.

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Monetary yardsticks provides a mean by which heterogeneous elements like land, Plant and
equipment, inventories, securities many be expressed in numbers which can be compared.

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Skills and competence of employees cannot be attributed an objective monetary value and
should therefore not be recognized as assets in the balance sheet.

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However, those transactions related to employees that can be measured reliably such as
salaries expense is recognized in the financial statements.

3) Stable monetary unit:
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An implicit assumption in accounting that monetary unit remains stable and values recorded
at the time that event occur are not changed.

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The core concept of stable monetary unit is that the value of Rupees will remain the same
over time.

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So, this concept actually permits the accountants to overlook the results of inflation.

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On the basis of this supposition, we observe that the old financial documents are not revised
even though the worth of money often gets changed.

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It is important to exercise this concept but this concept can create some severe problems if
currency deflates or inflates rapidly and it can be quite problematic.

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The monetary unit assumption is that in the long run, the dollar is stable it does not lose its
purchasing power.

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This assumption allows the accountant to add the cost of a parcel of land purchased in 2013 to
the cost of land purchased in 1956.

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For example, if a two-acre parcel cost the company $20,000 in 1956 and in 2013 a two-acre
parcel adjacent to the original parcel is purchased for a cost of $800,000, the accountant will
add the $800,000 to the land account and will report the land account's balance of $820,000
on the company's balance sheet.

4) Going concern:
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Accounting is normally based on premise that the business entity will remain a going concern.

5) Historical Cost concept:
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Assets acquired by a business are generally recorded by the cost and is used for all subsequent
accounting purposes.

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Accounting cost concept states that all assets are recorded in the books of accounts at their
purchase price, which includes cost of acquisition, transportation and installation and not at
its market price.

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It means that fixed assets like building, plant and machinery, furniture etc are recorded in the
books of accounts at a price paid for them.

Examples
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100 units of an item were purchased one month back for $10 per unit. The price today is $11
per unit. The inventory shall appear on balance sheet at $1,000 and not at $1,100.

6) ACCOUNTING PERIOD CONCEPT
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This concept assumes that, indefinite life of business is divided into parts. These parts are
known as Accounting Period.

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It may be of one year, six months, three months, one month, etc.

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But usually one year is taken as one accounting period which may be a calendar year or a
financial year.

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All the transactions are recorded in the books of accounts on the assumption that profits on
these transactions are to be ascertained for a specified period.

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This is known as accounting period concept.

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Thus, this concept requires that a balance sheet and profit and loss account should be
prepared at regular intervals.

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This is necessary for different purposes like, calculation of profit, ascertaining financial
position, tax computation etc.

7) DUAL ASPECT CONCEPT
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Dual aspect is the foundation or basic principle of accounting.

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It provides the very basis of recording business transactions in the books of accounts.

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This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in
their respective opposite sides.

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Therefore, the transaction should be recorded at two places. It means, both the aspects of the
transaction must be recorded in the books of accounts.

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For example, goods purchased for cash has two aspects which are

(i) Giving of cash
(ii) Receiving of goods.
These two aspects are to be recorded.
e.g. Purchase of machinery by cheque
The two aspects in the transaction are
(i) Reduction in Bank Balance
(ii) Owning of Machinery
3. Goods sold for cash
The two aspects are
(i) Receipt of cash
(ii) Delivery of goods to the customer

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8) Realisation concept:
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This concept states that revenue from any business transaction should be included in the
accounting records only when it is realised.

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The term realisation means creation of legal right to receive money.

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Selling goods is realisation, receiving order is not.

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E.g. N.P. Jeweller received an order to supply gold ornaments worth Rs.500000. They supplied
ornaments worth Rs.200000 up to the year ending 31st December 2005 and rest of the
ornaments were supplied in January 2006.

The revenue for the year 2005 for N.P. Jeweller is Rs.200000. Mere getting an order is not
considered as revenue until the goods have been delivered.
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E.g. A person sold goods on credit for Rs.50,000 during the year ending 31st December 2005.
The goods have been delivered in 2005 but the payment was received in March 2006.

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The revenue of the person for the year 2005 is Rs.50,000, because the goods have been
delivered to the customer in the year 2005.

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Revenue became due in the year 2005 itself. In the above examples, revenue is realised when
the goods are delivered to the customers.

9) ACCRUAL CONCEPT
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The meaning of accrual is something that becomes due especially an amount of money that is
yet to be paid or received at the end of the accounting period.

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It means that revenues are recognised when they become receivable.

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Though cash is received or not received and the expenses are recognised when they become
payable though cash is paid or not paid.

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Both transactions will be recorded in the accounting period to which they relate.

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E.g. For example, a firm sells goods for Rs 55000 on 25th March 2005 and the payment is not
received until 10th April 2005, the amount is due and payable to the firm on the date of sale
i.e. 25th March 2005.

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It must be included in the revenue for the year ending 31st March 2005.

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E.g. For example, if the firm received goods costing Rs.20000 on 29th March 2005 but the
payment is made on 2nd April 2005.

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The accrual concept requires that expenses must be recorded for the year ending 31st March
2005 although no payment has been made until 31st March 2005 though the service has been
received and the person to whom the payment should have been made is shown as creditor.

10) MATCHING CONCEPT
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The matching concept states that the revenue and the expenses incurred to earn the revenues
must belong to the same accounting period.

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So once the revenue is realised, the next step is to allocate it to the relevant accounting
period.

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This can be done with the help of accrual concept.

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Transactions of a business during the month of December, 2006

(i) Sale : cash Rs.2000 and credit Rs.1000
(ii) Salaries Paid Rs.350
(iii) Commission Paid Rs.150
(iv) Interest Received Rs.50
(v) Rent received Rs.140, out of which Rs.40 received for the year 2007
(vi) Carriage paid Rs.20
(vii) Postage Rs.30
(viii) Rent paid Rs.200, out of which Rs.50 belong to the year 2005
(ix) Goods purchased in the year for cash Rs.1500 and on credit Rs.500

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(x) Depreciation on machine Rs.200

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The matching concept implies that all revenues earned during an accounting year, whether
received/not received during that year and all cost incurred, whether paid/not paid during the
year should be taken into account while ascertaining profit or loss for that year.

The financial statement:
Balance Sheet (Statement of Financial Position):
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presents the financial position of an entity at a given date.

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It is comprised of the following three elements:

1) Assets: Something a business owns or controls (e.g. cash, inventory, plant and machinery,
etc.)
 classified into Current and Non-Current.
 The distinction is made on the basis of time period in which the economic benefits from the
asset will flow to the entity.
 Current Assets are ones that an entity expects to use within one-year time from the reporting
date.
 Non Current Assets are those whose benefits are expected to last more than one year from
the reporting date.

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Liabilities: Something a business owes to someone (e.g. creditors, bank loans, etc.)
 Liabilities may be classified into Current and Non-Current. The distinction is made on the basis
of time period within which the liability is expected to be settled by the entity.
 Current Liability is one which the entity expects to pay off within one year from the reporting
date.
 Non-Current Liability is one which the entity expects to settle after one year from the
reporting date.
Equity:
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What the business owes to its owners.

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represents the amount of capital that remains in the business after its assets are used to pay
off its outstanding liabilities.

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the difference between the assets and liabilities.
Assets - Liabilities = Equity

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includes share capital contributed by the shareholders along with any profits or surpluses
retained in the entity.

Current and Noncurrent Assets on the Balance Sheet
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Assets are resources a company owns.

1) Current assets for the balance sheet
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Examples of current assets are cash, account receivables, and inventory.

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Cash: Cash includes accounts such as the company’s operating checking account, which the
business uses to receive customer payments and pay business expenses.

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Accounts receivable: This account shows all money customers owe to a business for a
completed sales transactions. For example, Business A sells merchandise to Business B with
the agreement that B pay for the merchandise within 30 business days.

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Inventory: Goods available for sale reflect on a merchandiser’s balance sheet in this account.
A merchandiser is a retail business, like your neighbourhood grocery store, that sells to the
general public. For a manufacturing company, a business that makes the items merchandisers
sell, this category also includes the raw materials used to make items.

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Prepaid expenses: Prepaid’s are any expense the business pays for in advance, such as rent,
insurance, office supplies, postage, travel expense, or advances to employees. They also list as

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current assets, as long as the company envisions receiving the benefit of the prepaid items
within 12 months of the balance sheet date.
2) Noncurrent assets for the balance sheet
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Long-term assets are ones the company reckons it will hold for at least one year. Typical
examples of long-term assets are investments and property, plant, and equipment currently in
use by the company in day-to-day operations.

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Fixed assets: This category is the company’s property, plant, and equipment. The account
includes long-lived assets, such as a car, land, buildings, office equipment, and computers.

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Long-term investments: These investments are assets held by the company, such as bonds,
stocks, or notes.

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Intangible assets: These assets lack a physical presence (you can’t touch or feel them).
Patents, trademarks, and goodwill classify as noncurrent assets

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Liabilities are claimed against the company’s assets.

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Usually, they consist of money the company owes to others.

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For example, the debt can be to an unrelated third party, such as a bank, or to employees for
wages earned but not yet paid.

Current Liabilities on the Balance Sheet
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Short-term notes payable: Notes due in full less than 12 months after the balance sheet date
are short term. For example, a business may need a brief influx of cash to pay mandatory
expenses such as payroll. A good example of this situation is a working capital loan, which a
bank makes with the expectation that the loan will be paid back from collection of account
receivables or the sale of inventory.

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Accounts payable: This account shows the amount of money the company owes to its
vendors.

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Dividends payable: Payments due to shareholders of record after the date declaring the
dividend.

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Payroll liabilities: Most companies accrue payroll and related payroll taxes, which means the
company owes them but has not yet paid them.

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Current Liabilities on the Balance Sheet
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Current portion of long-term notes payable: If a short-term note has to be paid back within 12
month of the balance sheet date, you’ve probably guessed that a long-term note is paid back
after that 12-month period. However, you have to show the current portion (that which will
be paid back in the current operating period) as a current liability.

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Unearned revenue: This category includes money the company collects from customers that it
hasn’t yet earned by doing the complete job for the customers but that it anticipates earning
within 12 months of the date of the balance sheet.

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Tax payable

Non-Current Liabilities on the Balance Sheet
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Bonds payable: Long-term lending agreements between borrowers and lenders. For a
business, it’s another way to raise money besides selling stock.

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Long-term leases: Capital leases (you record the rental arrangement on the balance sheet as
an asset rather than the income statement as an expense) that extend past 12 months of the
date of the balance sheet. Because the rental arrangement is recorded as an asset, the related
lease obligation must be recorded as a liability.

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Product warranties: Report as noncurrent when the company expects to make good on
repairing or replacing goods sold to customers and the obligation extends beyond 12 months
from the balance sheet date.

List of equities:
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Common Stock: This account reflects the value of outstanding shares of stock sold to
investors. A company calculates this value by multiplying the number of shares issued by the
value of each share of stock. Only corporations need to establish this account.

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Retained Earnings: This account tracks the profits or losses accumulated since a business was
opened. At the end of each year, the profit or loss calculated on the income statement is used
to adjust the value of this account.

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Capital: This account is only necessary for small, unincorporated businesses. The Capital
account reflects the amount of initial money the business owner contributed to the company
as well as owner contributions made after initial start-up.

•

The value of this account is based on cash and other assets contributed by the business
owner, such as equipment, vehicles, or buildings. If a small company has several different
partners, then each partner gets his or her own Capital account to track his or her
contributions.

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Common stock is a form of corporate equity ownership, a type of security.

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If preferred stock exist, common stock holders cannot be paid dividends until all preferred
stock dividends are paid in full.

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In the event of bankruptcy, common stock investors receive any remaining funds after
bondholders, creditors (including employees), and preferred stock holders are paid. As such,
common stock investors often receive nothing after a bankruptcy.

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On the other hand, common shares on average perform better than preferred shares or bonds
over time.

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Common stock usually carries with it the right to vote on certain matters, such as electing the
board of directors. However, a company can have both a "voting" and "non-voting" class of
common stock.

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Holders of common stock are able to influence the corporation through votes on establishing
corporate objectives and policy, stock splits, and electing the company's board of directors.

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Some holders of common stock also receive pre-emptive rights, which enable them to retain
their proportional ownership in a company should it issue another stock offering.

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There is no fixed dividend paid out to common stock holders and so their returns are
uncertain, contingent on earnings, company reinvestment, efficiency of the market to value
and sell stock.

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Preferred stock (also called preferred shares, preference shares or simply preferreds) is
a stock which may have any combination of features not possessed by common stock
including properties of both an equity and a debt instrument, and is generally considered a
hybrid instrument.

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preferred stocks are rated by the major credit-rating companies.

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The rating for preferreds is generally lower, since preferred dividends do not carry the same
guarantees as interest payments from bonds and they are junior to all creditors.

Common stock vs. Preferred stock
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Preferred stockholders have a greater claim to a company's assets and earnings.

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This is true during the good times when the company has excess cash and decides to distribute
money in the form of dividends to its investors.

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In these instances when distributions are made, preferred stockholders must be paid before
common stockholders.

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•

However, this claim is most important during times of insolvency when common stockholders
are last in line for the company's assets.

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This means that when the company must liquidate and pay all creditors and bondholders,
common stockholders will not receive any money until after the preferred shareholders are
paid out.

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Second, the dividends of preferred stocks are different from and generally greater than those
of common stock.

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When you buy a preferred stock, you will have an idea of when to expect a dividend because
they are paid at regular intervals.

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This is not necessarily the case for common stock, as the company's board of directors will
decide whether or not to pay out a dividend.

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Because of this characteristic, preferred stock typically don't fluctuate as often as a company's
common stock and can sometimes be classified as a fixed income security.

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Adding to this fixed-income personality is the fact that the dividends are typically guaranteed,
meaning that if the company does miss one, it will be required to pay it before any future
dividends are paid on either stock.
To sum up: a good way to think of a preferred stock is as a security with characteristics
somewhere in-between a bond and a common stock

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Why the balance sheet always balances?

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Assets of an entity may be financed from internal sources (i.e. share capital and profits) or
from external credit (e.g. bank loan, trade creditors, etc.).

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Since the total assets of a business must be equal to the amount of capital invested by the
owners (i.e. in the form of share capital and profits not withdrawn) and any borrowings, the
total assets of a business must equal to the sum of equity and liabilities.

Purpose & Importance
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When analyzed over several accounting periods, balance sheets may assist in identifying
underlying trends in the financial position of the entity.

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•

It is particularly helpful in determining the state of the entity's financial risk, credit risk and
business risk.

•

When used in conjunction with other financial statements of the entity and the financial
statements of its competitors, balance sheet may help to identify relationships and trends
which are indicative of potential problems or areas for further improvement.

•

Analysis of the statement of financial position could therefore assist the users of financial
statements to predict the amount, timing and volatility of entity's future earnings.

Profit and Loss statement or the income statement
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major financial statements used by accountants and business owners.

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important because it shows the profitability of a company during the time interval specified in
its heading.

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shows revenues, expenses, gains, and losses; it does not show cash receipts (money you
receive) nor cash disbursements (money you pay out).

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the following are the elements of income statements:

A. Revenues and Gains
1. Revenues from primary activities
2. Revenues or income from secondary activities
3. Gains (e.g., gain on the sale of long-term assets, gain on lawsuits)
B. Expenses and Losses
1. Expenses involved in primary activities
2. Expenses from secondary activities
3. Losses (e.g., loss on the sale of long-term assets, loss on lawsuits)
Revenues and Gains:
1. Revenues from primary activities are operating revenues.
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The primary activities of a retailer are purchasing merchandise and selling the merchandise.

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The primary activities of a manufacturer are producing the products and selling them.

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For retailers, manufacturers, wholesalers, and distributors the revenues resulting from their
primary activities are referred to as sales revenues or sales.

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The primary activities of a company that provides services involve acquiring expertise and
selling that expertise to clients.

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•

For companies providing services, the revenues from their primary services are referred to as
service revenues or fees earned.

Difference between cash receipts and revenue?
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if a retailer gives customers 30 days to pay, revenues occur (and are reported) when the
merchandise is sold to the buyer, not when the cash is received 30 days later.

•

If merchandise is sold in December, the sale is reported on the December income statement.

•

When the retailer receives the check in January for the December sale, the retailer has a
January receipt—not January revenues.

2. Revenues from secondary activities are non-operating revenues.
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These are the amounts a business earns outside of purchasing and selling goods and services.

•

For example, when a retail business earns interest on some of its idle cash, or earns rent from
some vacant space, these revenues result from an activity outside of buying and selling
merchandise.

•

As a result the revenues are reported on the income statement separate from its primary
activity of sales or service revenues.

•

Non-operating revenues are reported on the profit and loss statement during the period when
they are earned, not when the cash is collected.

3. Gains such as the gain on the sale of long-term assets, or lawsuits result from a transaction that is
outside of the primary activities of most businesses.
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A gain is reported on the income statement as the net of two amounts: the proceeds received
from the sale of a long-term asset minus the amount listed for that item on the company's
books (book value).

•

A gain occurs when the proceeds are more than the book value.

Example:

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Assume that a clothing retailer decides to dispose of the company's car and sells it for $6,000.

•

The $6,000 received for the car (the proceeds from the disposal of the car) will not be included
with sales revenues since the account Sales is used only for the sale of merchandise.

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•

Since this retailer is not in the business of buying and selling cars, the sale of the car is outside
of the retailer's primary activities.

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Over the years, the cost of the car was being depreciated on the company's accounting
records and as a result, the money received for the car ($6,000) was greater than the net
amount shown for the car on the accounting records ($3,500).

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This means that the company must report a gain equal to the amount of the difference—in
this case, the gain is reported as $2,500.

•

This gain should not be reported as sales revenues, nor should it be shown as part of the
merchandiser's primary activities.

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Instead, the gain will appear in a section on the income statement labelled as "non-operating
gains" or "other income". The gain is reported in the period when the disposal occurred.

B. Expenses and Losses
1. Expenses involved in primary activities are expenses that are incurred in order to earn normal
operating revenues.
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expense should appear on the income statement in the same period that the related sales are
reported, regardless of when the commission is actually paid.

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In the same way, the cost of goods sold is matched with the related sales on the income
statement, regardless of when the supplier of the merchandise is paid.

The Income Statement
profit and loss statement (P&L), revenue statement, statement of financial performance, earnings
statement, operating statement, or statement of operations) or income statement
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The profit and loss statement is a summary of the financial performance of a business over a
period

•

It reflects the past performance

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•

As the name indicates the profit and loss a profit and loss statement summarises the income
for a period and subtracts the expenses incurred for the same period to calculate the profit or
loss for the business.

•

Keep in mind that the income statement shows revenues, expenses, gains, and losses; it does
not show cash receipts (money you receive) nor cash disbursements (money you pay out).

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People pay attention to the profitability of a company. 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.

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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.

Elements of the Income Statement

21
Let’s just think of what a company does …
Very roughly, from a financial point of view, there are only two things: Money IN and Money OUT. Or,
in more proper terms, we have:
Income
Expenses
That would give us some idea, but not really enough. Hence we’ll need a little more detail and
it is customary to split Income and Expenses up into the main items.

Elements of the Income Statement

Income or Revenues
In many cases, especially in the case of smaller companies, this is just one or two items depending on
the nature of the business
Sales (a retail or manufacturing operation)
Service (a doctor or consulting firm)
Interest (an investment firm)
Commissions (a money changer or broker)
1. Revenues from primary activities
2. Revenues or income from secondary activities
3. Gains (e.g., gain on the sale of long-term assets, gain on lawsuits)
•

PRIMARY ACTIVITIES

•

For a retailer, wholesaler, and distributor the primary activities would be the buying of
merchandise and then the sale of that merchandise. A manufacturer's primary activities
would be the production and sale of products.

SECONDARY ACTIVITIES
•

Also referred to as peripheral activities. A company's activities outside of its main activities of
buying/producing and selling.

22
•

Examples include a retailer's financing function involving interest revenue and interest
expense, disposal of long term assets used in the business, lawsuit settlements, renting out
unused space, etc.

Elements of the Income Statement
Expenses
Usually, there are a least a few categories. Exactly which ones again depends on the nature of the
business.
Cost of Sales
Wages
Interest (on loans)
Rent (for office and store space)
Taxes
Expenses and Losses
1. Expenses involved in primary activities
2. Expenses from secondary activities
3. Losses (e.g., loss on the sale of long-term assets, loss on lawsuits)
A quick preview
+

Sales

-

Cost of Sales

=

Gross Profit

-

Other Expenses

=

EBITDA

23

-

Interest, Taxes and Amortization

=

Net Income (hence Profit if + and Loss if -)

Elements of the Income Statement
Gross Profit
This is the first indication of how a company is doing (if this is negative, watch out!).
The gross profit is basically the difference between the income from the main line of the business
minus the actual cost associated with generating that income.
For a shop i.e. : Gross Profit = Sales – Cost of Goods sold.

Cost of goods sold (COGS)

•

Cost of goods sold or COGS refer to the carrying value of goods sold during a particular period

•

COGS includes all the costs directly related to getting your inventory ready for sale such as:

•

i.

the purchase price,

ii.

import duties,

iii.

non-recoverable taxes,

iv.

freight inwards,

v.

freight insurance,

vi.

handling,

vii.

direct labour, and

viii.

other costs of converting materials into finished goods.

Many businesses sell goods that they have bought or produced. When the goods are bought
or produced, the costs associated with such goods are capitalized as part of inventory (or

24
stock) of goods. These costs are treated as an expense in the period the business recognizes
income from sale of the goods.
•

Determining costs requires keeping records of goods or materials purchased and any
discounts on such purchase. In addition, if the goods are modified, the business must
determine the costs incurred in modifying the goods.

•

Such modification costs include labor, supplies or additional material, supervision, quality
control and use of equipment.

•

Principles for determining costs may be easily stated, but application in practice is often
difficult due to a variety of considerations in the allocation of costs.

•

Cost of goods sold may also reflect adjustments. Among the potential adjustments are decline
in value of the goods (i.e., lower market value than cost), obsolescence, damage, etc.

•

COGS vary directly with sales and production; the more items you sell or make, the more stock
or components you need to buy.

•

Generally, COGS only applies where there is a sale of stock or inventory and is the total direct
cost of getting your products into inventory and ready for sale.

•

Retail business:
COGS includes the cost of buying stock for resale, and freight inwards.

•

Manufacturer:
COGS includes the cost of raw materials or parts, and the direct labour costs used to
manufacture the product.

•

Business selling only services (e.g. accountants or consultants):

These usually do not have COGS unless they hire additional casual or contract labour to
provide direct services to clients.
For example, the COGS for a bicycle retailer would include the costs of the component parts
plus the labour costs used to assemble the bicycle
Example:
A retailer's cost of goods sold is equal to the cost of its beginning inventory plus the cost of its net
purchases (the combination of these is the cost of goods available) minus the cost of its ending
inventory.
The cost of goods sold is also the cost of the net purchases plus or minus the change in the inventory
during the accounting period. For example, if the inventory increased, the cost of goods sold is the

25
cost of the net purchases minus the increase in the inventory. If the inventory decreased, the cost of
goods sold is the cost of the net purchases plus the decrease in inventory
Elements of the Income Statement
Gross Profit…………….continued
Be careful though! Gross Profit (as is the case with quite a few accounting terms) can be defined in
many ways.
In the case of a small shop, there will probably be little dispute about what Gross Profit is (sales price
– cost price). But how about service or labor intensive industries.
In general, wages closely related to e.g. production are included in ‘cost of sales’ but wages of the
upper management are not. The question will be: where to draw the line?
It is often up to the individual company to decide what exactly is part of the ‘cost of sales’ and what
not.

Elements of the IncoEBITDA
Earnings before Interest, Taxes, Depreciation and Amortization
•

This is quite a mouthful, but fortunately not as difficult to understand as one would initially
think.

•

EBITDA provides important insight into how well the company is doing from an operational
point of view. This is also called ‘operating profit’

•

As its name suggests, it is created by considering a company's earnings before interest
payments, tax, depreciation, and amortization are subtracted for any final accounting of its
income and expenses.

It is intended to allow a comparison of profitability between different companies, by canceling the
effects of interest payments from different forms of financing (by ignoring interest payments),
political jurisdictions (by ignoring tax), collections of assets (by ignoring depreciation of assets), and
different takeover histories (by ignoring amortization often stemming from goodwill).me Statement

EBITDA - Earnings
This is probably the easiest term.

26
To many, it is just another word for profit.
Contrary to profit, however, the term earnings is also used when certain items are excluded (as in
EBITDA).
EBITDA - Interest
Many companies borrow money in order to finance their operation or their expansion plans.
Naturally, the companies will need to pay interest on the money they borrow.
Sometimes this number can be negative when companies have excess cash.
EBITDA - Taxes
We all need to pay taxes and so do companies … well most of the time. There are many exceptions
and rules of course.
EBITDA - Depreciation
When a company buys equipment, it is reasonable to spread the costs every year such that the entire
cost is accounted for by the time the equipment reaches the end of its useful life.
A computer e.g. is often written off over a time period of three years. This means that each year, e.g.,
one third of the computer’s cost is subtracted from the Gross Profit.
Doing this provides a more accurate picture of the true performance of the company.
EBITDA – Depreciation continued
If a company would write off its equipment in one go, it would incur an unnatural loss in the first year
and an unnatural profit in subsequent years. Such a distortion of the financial performance would
make it very difficult to judge whether the company is doing well or not.
EBITDA – Amortization
Amortization (or amortisation) is the process of decreasing, or accounting for, an amount over a
period.
Basically, this is the same as depreciation but rather than spreading the cost of equipment over a time
span, Amortization is the systematic reduction of a lump sum paid or the write off of an intangible
asset over time.
Example of Lump Sum: Spread out the costs of hiring a ‘super CEO’ over the time of his contract.
Example of Write Off: Spread the expenses related to a copyright over the economic lifetime of the
copyright.
Applications of amortization:

27
•

When used in the context of a home purchase, amortization is the process by which loan
principal decreases over the life of a loan, typically an amortizing loan. With each mortgage
payment that is made, a portion of the payment is applied towards reducing the principal, and
another portion of the payment is applied towards paying the interest on the loan.
An amortization schedule, a table detailing each periodic payment on a loan, shows this ratio
of principal and interest and demonstrates how a loan's principal amount decreases over
time.

•

In business, amortization allocates a lump sum amount to different time periods, particularly
for loans and other forms of finance, including related interest or other finance charges.
Amortization is also applied to capital expenditures of certain assets under accounting rules,
particularly intangible assets, in a manner analogous to depreciation.

What is the difference between amortization and depreciation?
•

Because very few assets last forever, one of the main principles of accrual accounting requires
that an asset's cost be proportionally expensed based on the time period over which the asset
was used.

Both depreciation and amortization (as well as depletion) are methods that are used to prorate the
cost of a specific type of asset to the asset's life. It is important to mention that these methods are
calculated by subtracting the estimated value that an asset will realize upon its sale at the end of its
useful life from its original cost.
Amortization usually refers to spreading an intangible asset cost over that asset's useful life. For
example, a patent on a piece of medical equipment usually has a life of 17 years. The cost involved
with creating the medical equipment is spread out over the life of the patent, with each portion being
recorded as an expense on the company's income statement.
Depreciation, on the other hand, refers to prorating a tangible asset's cost over that asset's life. For
example, an office building can be used for a number of years before it becomes run down and is sold.
The cost of the building is spread out over the predicted life of the building, with a portion of the cost
being expensed each accounting year.
Depletion refers to the allocation of the cost of natural resources over time. For example, an oil well
has a finite life before all of the oil is pumped out. Therefore, the oil well's setup costs are spread out
over the predicted life of the oil well.
It is important to note that in some places, such as Canada, the terms amortization and depreciation
are often to used interchangeably to refer to both tangible and intangible assets.

28
Example of EBITDA:

29

30

Other Expenses
In the end, all expenses need to be accounted for somewhere. Hence everything that is not part of
‘Cost of Sales’ and ‘EBITDA’ is lumped together here.
This may include: Wages, Rent, Advertising ….
Net Income
Net income is the real profit or loss of the company. In other words, the money that the company has
earned (unless it’s loosing money of course) for its owners.

A convenient table that lists Income and Expenses and sums them up.

+

Sales

-

Cost of Sales

31

=

Gross Profit

-

Other Expenses

=

EBITDA

-

Interest, Taxes and Amortization

=

Net Income (hence Profit if + and Loss if -)

Cash flow statement
Reports the cash generated and used during the time interval specified in its heading.
•

The statement captures both the current operating results and the accompanying changes in
the balance sheet.

•

As an analytical tool, the statement of cash flows is useful in determining the short-term
viability of a company, particularly its ability to pay bills.

The cash flow statement organizes and reports the cash generated and used in the following
catagories:

•
i.

People and groups interested in cash flow statements include:
Accounting personnel, who need to know whether the organization will be able to cover
payroll and other immediate expenses

32
ii.

Potential lenders or creditors, who want a clear picture of a company's ability to repay

iii.

Potential investors, who need to judge whether the company is financially sound

iv.

Potential employees or contractors, who need to know whether the company will be able to
afford compensation

v.

Shareholders of the business.

Why cash flow statement?

•

The cash flow statement reflects a firm's liquidity. AS “CASH IS KING”

•

The balance sheet is a snapshot of a firm's financial resources at a single point in time, and the
income statement summarizes a firm's financial transactions over an interval of time. These
two financial statements reflect the accrual Basis accounting used by firms to match revenues
with the expenses associated with generating those revenues.

•

The cash flow statement includes only inflows and outflows of cash and cash equivalents; it
excludes transactions that do not directly affect cash receipts and payments. These non-cash
transactions include depreciation or write-offs on bad debts or credit losses to name a few.

•

The cash flow statement is a cash basis report on three types of financial activities: operating
activities, investing activities, and financing activities. Non-cash activities are usually reported
in footnotes.

•

The cash flow statement is intended to:

•

i.

Provide information on a firm's liquidity and solvency and its ability to change cash
flows in future circumstances

ii.

Provide additional information for evaluating changes in assets, liabilities and equity

iii.

Improve the comparability of different firms' operating performance by eliminating
the effects of different accounting methods

iv.

Indicate the amount, timing and probability of future cash flows

The cash flow statement has been adopted as a standard financial statement because it
eliminates allocations, which might be derived from different accounting methods, such as
various timeframes for depreciating fixed assets.

Operating activities
•

The activities involved in earning revenues.

33
•

For example, the purchase or manufacturing of merchandise and the sale of the merchandise
including marketing and administration.

•

In the statement of cash flows the operating activities section identifies the cash flows
involved with these activities by focusing on net income and the changes in the current assets
and current liabilities.

Cash provided from or used by operating activities
•

This section of the cash flow statement reports the company's net income and then converts it
from the accrual basis to the cash basis by using the changes in the balances of current
asset and current liability accounts, such as:

•

Accounts receivable
inventory
supplies
prepaid insurance
other current assets
notes payble
accounts payable
wages payable
payroll taxes payable
interest payable
income taxes payable
unearned revenues
other current liabilities

In addition to using the changes in current assets and current liabilities, the operating activities
section has adjustments for depreciation expense and for the gains and losses on the sale of longterm assets.
Cash provided from or used by investing activities
•

This section of the cash flow statement reports changes in the balances of long-term
asset accounts, such as:

•

Long-term investments
land
buildings
equipment
furniture & fixtures
vehicles

•

In short, investing activities involve the purchase and/or sale of long-term investments and
property, plant, and equipment.

34
Cash provided from or used by financing activities
•

This section of the cash flow statement reports changes in balances of the long-term
liability and stockholders' equity accounts, such as:

•

Notes payable (generally due after one year)
bonds payable
deferred income taxes
preferred stock
paid-in capital in excess of par-preferred stock
common stock
paid-in capital in excess of par-common stock
paid-in capital from treasury stock
retained earnings
treasury stock

•

In short, financing activities involve the issuance and/or the repurchase of a company's own
bonds or stock as well as short-term and long-term borrowings and repayments.

Account receivables
•

In the world of business, many companies must be willing to sell their goods (or services) on
credit.

•

This would be equivalent to the grocer transferring ownership of the groceries to you, issuing
a sales invoice, and allowing you to pay for the groceries at a later date.

•

Whenever a seller decides to offer its goods or services on credit, two things happen:

(1) the seller boosts its potential to increase revenues since many buyers appreciate the
convenience and
efficiency of making Purchases on credit
(2) the seller opens itself up to potential losses if its customers do not pay the sales invoice
amount when it
becomes due.
•

Accounts receivable are a legally enforceable claim for payment to a business by its customer/
clients for goods supplied and/or services rendered in execution of the customer’s order.

•

These are generally in the form of invoices raised by the business and delivered to the
customer for payment within an agreed time frame.

•

Accounts receivable are shown in the balance sheet as asset. It is one of a series
of accounting transactions dealing with the billing of a customer for goods and services that
the customer has ordered.

Prepaid Insurance

35
•

Prepaid insurance is the portion of an insurance premium that has been paid in advance and
has not expired as of the date of the balance sheet.

•

This unexpired cost is reported in the current asset account prepaid insurance.

•

This is usually done at the end of each accounting period through an adjusting entry.

•

To illustrate prepaid insurance, let's assume that on november 20 a company pays an
insurance premium of $2,400 for the six-month period of december 1 through may 31.

•

On november 20, the payment is entered with a debit of $2,400 to prepaid insurance and a
credit of $2,400 to cash.

•

As of november 30 none of the $2,400 has expired and the entire $2,400 will be reported as
prepaid insurance.

•

On december 31, an adjusting entry will debit insurance expense for $400 (the amount that
expired: 1/6 of $2,400) and will credit prepaid insurance for $400.

•

This means that the debit balance in prepaid insurance at december 31 will be $2,000 (5
months of insurance that has not yet expired times $400 per month; or 5/6 of the $2,400
insurance premium cost).

Notes payable
•

A promissory note is a legal instrument in which one party promises in writing to pay a
determinate sum of money to the other (the payee), under specific terms.

•

It is a liability, notes payable involves a written promissory note.

•

For example, if your company wishes to borrow $100,000 from its bank, the bank will require
company officers to sign a formal loan agreement before the bank provides the money.

•

The bank might also require your company to pledge collateral and for the company owners
to personally guarantee the loan.

•

Your company will record this loan in its general ledger account, notes payable. (The bank will
record the loan in its general account notes receivable.)

Payroll taxes payable
•

Payroll taxes are taxes that employers are required to pay when they pay their staff their
salaries.

•

Payroll taxes generally fall into two categories:

36
i)

deductions from an employee’s wages

ii)

taxes paid by the employer based on the employee's wages.

•

The first kind are taxes that employers are required to withhold from employee’s wages, also
known as withholding tax, and often covering advance payment of income tax, social security
contributions, and various insurances (e.G., Unemployment and disability).

•

The second kind is a tax that is paid from the employer's own funds and that is directly related
to employing a worker.

•

These can consist of fixed charges or be proportionally linked to an employee's pay. The
charges paid by the employer usually cover the employer's funding of the social security
system, and other insurance programs.

•

liabilities of the employer

Interest payable
•

This current liability account reports the amount of interest the company owes as of the date
of the balance sheet

•

is used to report the amount of interest that has been incurred but has not yet been paid as of
the date of the balance sheet.

•

let's assume that a company has $300,000 of debt with interest at 8% per year.

•

The company pays the monthly interest as required, which is 15 days after each month ends.

•

The loan began on january 2 of the current year.

•

If the company's accounting year ends on december 31, the amount of interest payable at
december 31 will be december's interest of $2,000 ($30,000 x 8% x 1/12).

•

The interest payable of $2,000 will be reported as a current liability since it is due within 15
days of the balance sheet date.

income taxes payable
•

A current liability account which reflects the amount of income taxes currently due to the
federal, state, and local governments.

•

Unearned revenue

•

A liability account that reports amounts received in advance of providing goods or services.

•

When the goods or services are provided, this account balance is decreased and a revenue
account is increased.

37
•

In financial accounting, unearned revenue refers to amounts received prior to being earned.
For example, if ABC service co. Receives $24,000 on december 31, 2012 for a one-year service
agreement covering january 1 through december 31, 2013, the entire $24,000 is unearned as
of december 31, 2012.

•

On the december 31, 2012 balance sheet ABC should report a liability such as unearned
revenues for $24,000.

•

During 2013 ABC should move $2,000 per month from the liability account on its balance
sheet to a revenue account on its income statement.

•

Example 2. A lawn service company offers customers a special package of five applications of
fertilizers and weed treatments for $200 if the customer prepays in march.

•

The service will be provided in april, may, june, july, and september.

•

When the company receives $200 in march, it will debit the asset cash for $200 and will credit
the liability account unearned revenues.

•

Since these are balance sheet accounts (and since no work has yet been performed), no
revenue is reported in march.

•

In april when the first service is provided, the company will debit the liability account
unearned revenues for $40 and will credit the income statement account service revenues for
$40.

•

At the end of april, the balance sheet will report the company's remaining liability of $160.

•

The income statement for april will report that $40 was earned.

The $40 entry is referred to as an adjusting entry and the same entry will be recorded in may, june,
july, and september.
Long-term investments
•

The balance sheet classification that is reported immediately after current assets and before
property, plant, and equipment.

•

Investing activities are identified with changes in a corporation's long-term assets.

•

Investing activities are reported in a separate section of the financial statement statement of
cash flows (scf)—also referred to as the cash flow statement

•

examples of investing activities include the acquisition (purchase) of long-term investments,
equipment used in the business, a building used in the business, and so on.

38
•

The purchase of these long-term assets is shown as a negative amount in the investing
activities section of the SCF, because the acquisition will use (will reduce) cash.

•

Investing activities also include the sale of long-term investments and the sale of long-term
assets that had been used in the business.

Supplemental Information
•

This section of the cash flow statement discloses the amount of interest and income taxes
paid.

•

Also reported are significant exchanges not involving cash. For example, the exchange of
company stock for company bonds would be reported in this section.

•

Non-cash investing and financing activities are disclosed in footnotes to the financial
statements.

•

Non-cash financing activities may include

i.

Leasing to purchase an asset

ii.

Converting debt to equity

iii.

Exchanging non-cash assets or liabilities for other non-cash assets or liabilities

iv.

Issuing shares in exchange for assets

39
Story To Illustrate
•

“A” college student who enjoys buying and selling merchandise using the internet.

•

On january 2, 2013, he decides to turn his hobby into a business called "good deal co."

•

Each month the good deal co. Will have one or two transactions.

•

At the end of each month we will prepare an income statement, balance sheet, and a
statement of cash flows for the current month and for the year-to-date period.

•

The purpose is to show how these transactions are reported on the cash flow statement.

January Transactions and Financial Statements
•

On january 2, 2013 “A” invests $2,000 of his personal money into his sole proprietorship, good
deal co.

•

On january 20, good deal buys 14 graphing calculators for $50 per calculator—this is about
50% less than the selling price A has observed at the retail stores.

•

The total cost to good deal for all 14 calculators is $700.

•

Good deal has no other transactions during january.

•

“A” prepares financial statements for his new business as of january 31, 2013:

40

•

Good deal's income statement for january showed no profit or loss, since it did not have any
sales or expenses.

•

However, the cash flow statement reports that good deal's operating activities resulted in a
decrease in cash of $700.

•

The decrease in cash occurred because the company increased its inventory by $700 during
january.

•

The financing activities section shows an increase in cash of $2,000 which corresponds to the
increase in CAPITAL (A's investment in the business). The net change in the cash account from
the owner's investment and the cash outflow for inventory is a positive $1,300.

•

This net change of a positive $1,300 is verified at the bottom of the cash flow statement and
on the balance sheet. There was a $0 cash at january 1, but at january 31, the cash balance is
$1,300.

February Transactions and Financial Statements
•

On february 25, 2013, good deal sells 10 calculators to a nearby high school for $80
each. A delivers the
calculators on february 25 and gives the school an $800 invoice
due by march 10. “A” receives $800 from the school on march 8.

•

A prepared financial statements for his new business as of february 28, 2013:

41

•

The income statement for the month of february shows revenues (or sales) of $800.

•

Under the accrual basis of accounting—revenue is recognized when title passes (at the time of
shipment or time of delivery), not when the money is received.

•

Expenses (such as the cost of goods sold for $500) appear on the income statement when they
best match up with revenues, not when the expenses or goods are paid for. (Other expenses
will also appear on the income statement when they are used, not when they are paid for.)

•

As a result of the accrual basis of accounting, the income statement reports $300 of net
income even though there was no cash inflow or cash outflow during february.

•

The cash flow statement for the month of February reports no change in cash. That agrees
with the company's balance sheet that reported Cash of $1,300 on January 31 and will show
$1,300 on February 28.

42

•

The year-to-date net income of $300 increases the owner's equity on the balance sheet.

•

Please note the connection between the bottom line of the year-to-date income statement
and the change in Capital on the balance sheet. Capital has increased from $2,000 to $2,300.

43

•

Good deal's income statement for the first two months shows a positive net income of $300.

•

However, the fact that the company's accounts receivable increased by $800 means the
company did not collect the cash from its sales.

•

And because inventory increased by $200, the company's cash had also decreased in order to
pay for the inventory increase.

•

As a result, the cash flows for the two-month period shows that good deal's cash from
operating activities is a negative $700.

•

Recall that good deal has not received any money yet from its operations (buying and selling
merchandise) and it paid out $700 for the 14 calculators it purchased.

•

The cash flow statement also shows $2,000 of financing by the owner. When this is combined
with the negative $700 from operating activities, the net change in cash for the first two
months is a positive $1,300. This agrees to the change in cash on the balance sheet—none on
january 1 but $1,300 on february 28.

March Transactions and Financial Statements
•

On march 8 good deal receives $800 for the calculators sold to the school on february 25. No
other transactions occurred in march.

•

The good deal financial statements dated march 31 are:

44

•

The income statement for the first three months of the business shows a net income of $300.
The operating activities section of the statement of cash flows begins with the $300 in net
income, but then shows that $200 of cash was used to increase inventory. As a result, only
$100 of cash was provided from operating activities.

•

The statement of cash flows also shows that $2,000 was received from the owner's
investment in the company. The net cash inflow from the company's operating, investing, and
financing activities for the three months ended march 31, 2013 was $2,100.

•

The figure of $2,100 represents the change in cash from the beginning of the accounting year
through march 31. If you look at the march 31 balance sheet, you will find that it confirms
this—there is $2,100 in the cash account on march 31 and there was $0 on january 1.

•

The statement of cash flows presented above was for the three months ended march 31,
2013. Let's look at how the statement of cash flows would be prepared for just one month—
march 2013.

•

Since much of the information for the cash flow statement comes from changes in balance
sheet accounts, we need to have the balance sheet amounts for both february 28, 2013 and
march 31, 2013. The differences in these account balances from february 28 to march 31 will
provide us with information we need on the activities in march.

45

•

Focus on the "change" column above. The first amount, a positive $800 change in the cash
account, will serve as a "check figure" for the bottom line of the cash flow statement for the
month of march.

•

In other words, the cash flow statement for march must end up explaining this $800 increase
in the cash account. The other amounts in the "change" column will be used on the statement
of cash flows to identify the reasons for the $800 increase in cash

•

Since there were no sales and no expenses in march, the income statement for the one month
of march (see above) reported no net income.

•

This $0 of net income is the first amount reported on the statement of cash flows.

•

The changes in the balance sheet accounts from february 28 to march 31 provided the other
information needed for the month of march:

46
•

Review Of the cash flow statement for the month of march 2013:

i.

Net income for march is $0, since there were no revenues, gains, expenses, or losses.

ii.

Cash increased by $800 because $800 of accounts receivable were collected during march.

iii.

Inventory did not change, so cash was not affected. (We could omit this line since it had no
effect on cash.)

iv.

There were no changes in long-term assets during march, so nothing is reported in the
investing activities section.

v.

There were no changes in long-term liabilities or owner's equity; hence, nothing is reported in
the financing activities section.

vi.

The summation of the amounts on the statement of cash flows is a positive $800. This amount
agrees to the increase in the cash account balance from $1,300 on february 28 to $2,100 on
march 31.