10 long term liabilities increase when you borrow and

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: nts received in March equal to sales on credit in January. That calculation favors the direct method. Ultimately, the choice of method doesn’t matter. As long as you’re consistent and careful with assumptions, the results should be the same. HURDLE: THE BOOK 16.10 ON BUSINESS PLANNING Links with the Balance Sheet Even though I cover the balance sheet in the next chapter, I can’t talk about cash without relating the cash flow to the balance. The three most important financial statements in a plan, income statement (profit and loss), cash flow, and balance sheet, are all related to each other. This next illustration shows the sample balance sheet linked to the cash flow in the previous illustration. Most of the rows on this balance sheet are directly affected by the cash flow, and need to change every time the cash changes. To close the circle in this chapter, let’s look in detail at the balance: RELATED BALANCE SHEET The information on the balance sheet should follow from the income statement and the cash flow. Notice, for example, how Long-term Liabilities, above, respond in March to a new loan and a regular principal payment of an existing loan shown in the cash flow table on page 16.8. 1. The “Cash” row is the balance in your checkbook. You calculate this with the cash flow, the subject of this chapter. 2. “Accounts Receivable”is the money owed to you by customers for sales already made. The balance increases with sales on credit, and decreases with payments of accounts receivable. For any month, the ending balance is the sum of the previous ending balance, plus new sales on credit, minus payments received. The details are in the Receivables Detail table on page 16.3. CHAPTER 16: CASH IS KING 16.11 3. Calculate the “Inventory” balance as the previous balance minus direct cost of sales plus new inventory purchases. The details are in the Inventory Detail table shown on page 16.7. 4. Calculate “Other Current Assets” as the previous balance plus new assets purchased (from the cash...
View Full Document

Ask a homework question - tutors are online