Now your balance sheet shows the same 100 in original

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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.

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