Financial Accounting for Decision Makers

Statement of cash flows for Tuesday
£
Opening balance (from Monday evening)
45
Cash from sales of wrapping paper
48
Cash paid to buy wrapping paper
(20)
Closing balance
73
Income statement for Tuesday
£
Sales revenue
48
Cost of goods sold (£20
+
£10)
(30)
Profit
18
Statement of financial position as at Tuesday evening
£
Cash (closing balance)
73
Inventories
–
Total assets
73
Equity
73
M02 Atrill's Financial Accounting For Decis 51257.indd 36
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THE MAJOR FINANCIAL STATEMENTS – AN OVERVIEW 
37
Note that the total business wealth has increased by £9 (that is, the amount of Wednesday’s profit) 
even though the cash balance has declined. This is because the business is holding more of its 
wealth in the form of inventories rather than cash, compared with the position on Tuesday evening.
By Wednesday evening, the equity stood at £82. This arose from Paul’s initial investment 
of £40, plus his profits for Monday (£15), Tuesday (£18) and Wednesday (£9). This represents 
Paul’s total investment in his business at that time. The equity of most businesses will simi-
larly be made up of injections of funds by the owner(s) plus any accumulated profits.
We can see that the income statement and statement of cash flows are both concerned 
with measuring flows (of wealth and cash respectively) during a particular period. The state-
ment of financial position, however, is concerned with the financial position at a particular 
moment in time. Figure 2.1 illustrates this point.
The three financial statements discussed are often referred to as the 
final accounts
of the 
business.
For external users (that is, virtually all users except the managers of the business con-
cerned), these statements are normally backward-looking because they are based on informa-
tion concerning past events and transactions. This can be useful in providing feedback on past 
performance and in identifying trends that provide clues to future performance. However, the 
statements can also be prepared using projected data to help assess likely future profits, cash 
flows and so on. Normally, this is done only for management decision-making purposes.
Now that we have an overview of the financial statements, we shall consider each one in 
detail. The remainder of this chapter is devoted to the statement of financial position.
On Wednesday, Paul bought more wrapping paper for £46 cash. However, it was raining 
hard for much of the day and sales were slow. After Paul had sold half of his total inven-
tories for £32, he decided to stop trading until Thursday morning.
Have a go at drawing up the three financial statements for Paul’s business for 
Wednesday.