Unformatted text preview: p between income statement, balance sheet, and cash.
Start with $100, which we’ll call capital. At the beginning of this exercise, your balance sheet has
assets of $100 — the money — and capital of $100. Assets are equal to capital plus liabilities. A
summary of the simple ﬁnancial statement at this point is shown in this ﬁrst illustration, Case Starting
Point. HURDLE: THE BOOK 14.6 ON BUSINESS PLANNING SIMPLE CASE STARTING POINT The simple ﬁnancials show a hypothetical widgets business as it starts.
If you buy a widget for $100 and sell it for $150, you should end up with $50 proﬁt, which is what your
income statement covers. Sales minus costs are proﬁt. You should have $150 in the bank. Now your
balance sheet shows the same $100 in original capital plus $50 in earnings, which are equal to the
$150 you have in cash as an asset. The next illustration shows you how the ﬁnancials look right after
Buy another widget for $100 and sell it again for $150, and now you have $200 in the bank. Do it
again, you have $250 in the bank. Your income statement shows sales of $450, cost of sales of $300,
and proﬁt of $150. At this point your business has sold three units and made $150 proﬁt. In theory it
has $250 in the bank. ONE WIDGET SOLD This table shows the ﬁnancials after the ﬁrst sale. NOW WITH THREE WIDGETS SOLD Now the company has sold three widgets and
made a proﬁt. Adding Some Realism
Now go back a step and make the situation more realistic. For example, most sales of products to
businesses are on terms, with the money generally due in 30 days. So if you sold that widget on credit
you don’t have $150 in the bank. You still have $50 in your bottom line, but now you have nothing in
the bank. Instead, a customer owes you $150, which is what we call “Accounts Receivable.”
Compare the One Widget Sold illustration to the Selling on Credit illustration on the next page. This
is what really happens to the huge number of businesses that sell to other businesses.
Knowing you can buy a widget for $100 and sell it for $150, you get your wi...
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