The Trouble with Conventional Financial Statement Reporting

Unfortunately, the way financial statements are presented to business managers and other interested readers does not pave the way for understanding how making profit drives the financial condition and cash flow of the business. You can miss the vital interplay between the income statement and the balance sheet because each statement is presented like a tub standing on its own feet; interconnections between these two financial statements are not made explicit.

Exhibits B and C in Chapter 2 present the balance sheet and income statement for a business, as you would see these two primary financial statements. Each of the two statements stands alone, by itself, which is the standard way of presenting financial statements in a financial report. There is no clear trail of the crossover effects between these two basic financial statements. The statements are presented on the assumption that readers understand the couplings and linkages between the two statements and that readers make appropriate comparisons.

In addition to the balance sheet and income statement, a third basic financial statement is required to be included in external financial reports that are released outside the business—the cash flow statement. Business managers, as well as creditors and investors, need a cash flow statement that summarizes the major sources and uses of cash during the period. So, you may well ask: Where is the cash flow statement for the company?

The summary of cash flows for the company that is presented in Chapter 1 is not exactly in the correct format required for the cash flow statement. The correct format is introduced in just a minute, in the next exhibit (Exhibit D). The key point here is that all three financial statements fit together like tongue-in-groove woodwork. The three financial statements interlock with one another.

EXHIBIT D—INTERLOCKING CONNECTIONS AMONG THE THREE PRIMARY FINANCIAL STATEMENTS

BALANCE SHEET

CASH FLOW STATEMENT FOR V SA H

IKCDMt STATEMENT FOR YËAfl

£ai-ii Rtv-?nue Cost of Gootfc SoW ÊUpeiKc

Grass Margin Operating Expenses Deprariat-on Expense Operallng Earnings Inianeat EipeJiw Earning! botgretim incornu Tfli Ejpnnsd Ne[ Income

Eimlng-i Par 5hara sio.^oc.ixio

6.760,000 ■? 3.640,MO Î.Oflfl.ÛM 360.000-î 1.3TO.5WJ IQO.OOO S 1,19-7,000 47»iBaC S 713,200-

Si.59

BALANCE SHEET

AiJSli

End of Year

Start of 'fear

Cash

S seî.BOJ

ï 750.0M

Accounts ReceJ^aiJEe

1 .CTO.K-0

025.000

Inventory

1,580.003

1,250.000

Prepaid Fyoen^ç

1W.0W

165,0X1

1BIW Current As&oIe

S3,-i1S,a07

sa.oio.ooo

Propi'My. Plan! i Eo> prient

3.DOO.OOD

2.250,000

AMUHIulalM Doprudiillan

■ISDD.ODQj

(=-10,000)

Tdai Assets

ss.Eiis.ao?

S4>7îO.ÛUCl

UaturEttm end

Owner J' foully

End of Year

Slan ol Year

Accounts Payable—In jarnary

A:cGurlE, payjfljle— Operaling E«penses

Total Account- Paysbte iicniim Ottraling ACCiUedlriliitoEl Faynbl" Total Accrued Expanse! "licorne Tan PiyMle Siiod-Tii™ Moms Payable Tat.j Curant UabiliL-.eE LCHig-Taon Nota* Payable Capital Stock 200.000 s nares i ■ HeULinoa Ej"-,ingE Total Ornera Eqiniy

1-J-U11 USOlHtlK afïd ûwers EqjllV

1S.S00

7.3 gjo 000

îl.546,107 750,000 775.000

30,300

J3,it9,700 ti ,751,600

Cnsh Flows Imm Operating

Acdvliu

Nel Income

AewLtniB Receivable lnfl»flia&

IÎ17S.0Q0:

invsnlory Incmasa

(440.000)

fruujiiJ Eipamss Docreete

25,000

DofHttiilHSti Eipwnse

260.000

AicdunlE Pbv-abla IrKnriss

105,000

Aseruad Expanses ncroaaa

53.667

Inctiinu Tai Payable Dicwase

(12,0601

Cash Flon/v Adjusfnems la Ha

Incomet

Cash Flow Fram Operating Adlvllius

Cash plows Prom Investing Aciivltles

- Purchase* of Pr(ip«ily. Pumt & Equipment

Cash Flows fram Financing Activities

Short-Tom DobtBoiromnrj LcH^-Tprm Debl Borrowing Capital Stock Issue EJiwdenes Pali SmctHiokiare

I r,crease I Decrease} in Cast, during Year

[S177.M3) i5i0,607

(tTSD.fioPi

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