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Unformatted text preview: fundamental ﬁnancial terms we
deﬁned in a previous section of this chapter. While an Income Statement will have some inﬂuence on
Assets, Liabilities, and Capital, it includes only Sales, Costs, Expenses, and Proﬁt.
The Income Statement is about the ﬂow of transactions over some speciﬁed period of time, like a
month, a quarter, a year, or several years.
We discuss the Income Statement in detail in Chapter 15: The Bottom Line. The Balance Sheet
The Balance Sheet shows a business’ ﬁnancial position, which includes Assets, Liabilities, and Capital,
on a speciﬁed date. It will always show Assets on the left side or on the top, with Liabilities and
Capital on the right side or the bottom.
Balance Sheets must always obey the underlying formula:
Assets = Liabilities + Capital Unless that simple equation is true, the Balance doesn’t balance and the numbers are not right. We
discuss the Balance Sheet in detail in Chapter 17: Finish the Financials later in this book. The Cash Flow
The Cash Flow statement is the most important and the least intuitive of the three. In mathematical
and ﬁnancial detail it reconciles the Income Statement with the Balance Sheet, but that detail is hard
to see and follow. What is most important is tracking the money. By cash we mean liquidity, as in the
balance in checking and related savings accounts, not strictly bills and coins. And tracking that cash is
the most important thing a business plan does. The underlying truth is:
Ending Cash = Starting Cash + Money Received – Money Spent What’s particularly important in planning is that neither the Income Statement alone nor the Balance
Sheet alone is sufﬁcient to plan and manage cash. We discuss the Cash Flow in much greater detail in
Chapter 16: Cash is King. A Simple Example
One of the best ways to understand the dilemma of cash vs. proﬁts is to follow an otherwiseproﬁtable company going broke because it can’t meet its obligations. This is a quick and simple
example. It also leads us into the relationshi...
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This note was uploaded on 01/26/2014 for the course BUINESS 102 taught by Professor Unknown during the Winter '09 term at University of Phoenix.
- Winter '09