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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
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- Winter '09