Financial Accounting for Decision Makers

statement of cash flows
;
■ 
the 
income statement
(also known as the profit and loss account); and
■ 
the 
statement of financial position
(also known as the balance sheet).
Together they provide an overall picture of the financial health of the business.
Perhaps the best way to introduce these financial statements is to look at an example of 
a very simple business. From this we shall be able to see the sort of information that each of 
the statements can usefully provide. It is, however, worth pointing out that, while a simple 
business is our starting point, the principles for preparing the financial statements apply 
equally to the largest and most complex businesses. This means that we shall continually 
encounter these principles again in later chapters.
Example 2.1
Paul was unemployed and unable to find a job. He therefore decided to embark on a busi-
ness venture. With Christmas approaching, he decided to buy gift wrapping paper from 
a local supplier and to sell it on the corner of his local high street. He felt that the price of 
wrapping paper in the high street shops was unreasonably high. This provided him with a 
useful business opportunity.
He began the venture with £40 of his own money, in cash. On Monday, Paul’s first day 
of trading, he bought wrapping paper for £40 and sold three-quarters of it for £45 cash.
What cash movements took place in Paul’s business during Monday?
For Monday, a 
statement of cash flows
showing the cash movements (that is, cash in and 
cash out) for the day can be prepared as follows:
Statement of cash flows for Monday
£
Cash introduced (by Paul)
40
Cash from sales of wrapping paper
45
Cash paid to buy wrapping paper
(40)
Closing balance of cash
45
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THE MAJOR FINANCIAL STATEMENTS – AN OVERVIEW 
35
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The statement shows that Paul placed £40 cash into the business. The business received 
£45 cash from customers, but paid £40 cash to buy the wrapping paper. This left £45 
of cash by Monday evening. Note that we are taking the standard approach found in 
financial statements of showing figures to be deducted (in this case the £40 paid out) in 
brackets. We shall take this approach consistently throughout the chapters dealing with 
financial statements.