Module 1: Accounting

Session: Case Study: Pizza Food Truck

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Video 1:
Now, I want to introduce you to the basics of accounting, that's all of us needs to
master through practice, through a simple exercise that will help you understand
where the impact of the day-to-day decisions appear on the financial statements,
and how the three financial statements all linked together.

So, this will all happen through launching a small business, a Pizza food truck
business. Why a Pizza food truck business? Business it's a simple business. We all
understand how things are going to happen, and we'll be manipulating fairly small
numbers. So, computations shouldn't be a problem. So, the plan is as follows.

We're going to start up this business together in the months of December and fill in
together the opening statements, so just to get the company started in December,
and then gradually, we'll move on to January, February, March, and April. At the end
of every month, we will have to compute the financial statements of that Pizza food
truck in order to recognise what has happened during the months.

It will be you and I working together, alternatively, on that exercise. Let's get
started. So, we're now in the month of December getting the company ready to
operate after the Christmas break. We are on December the 22nd, and we do invest
part of our personal savings into that business.

This business will be ours. We invest $5,000 of our personal savings into the business,
and thanks to the $5,000 we've just invested. We're going to go to the supermarket,
purchase food that we're going to store until we start operating in January.

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So, that's what happens before the Christmas break, and we need a couple of
financial statements to recognise what has just happened. Namely, we need a
cashflow statement because a couple of cash movements have already happened,
and we need a balance sheet at the end of December in order to leave a need sheet
before the Christmas break so that we know where we start from on January the 1st
and the start of production.

So, what happened? We start from scratch. Of course, the cash position of the
company at the very beginning is a zero. But as soon as we create the company, we
inject $5,000 of our personal savings into that business. This is a cash inflow that we
must recognise.

And at the same time, we must say, look, the 5,000 we just received, who do they
belong to? They belong to the shareholders. We as persons are not shareholders in
that company. The company may have issued, I don't know, 500 shares at $10 each,
and we bought as persons these 500 shares.

So, we are now the proud shareholders of that company, and the company owes us
$5,000 that we present the share capital of the company. So, the $5,000 of cash
inflow also represents on the liability side of the balance sheet, 5,000 of share
capital of the company.

Then, now that we have $5,000 in our wallet, what do we do with that cash? Well, we
go to the supermarket, we select some food, and when we exit the supermarket, we
do have to pay for this food. How much do we pay? $750. This is a cash outflow in
our cash flow statement.

And of course, in exchange, we're now the owners of some foot. If we are owning
something, it must appear in our balance sheet on the asset side. What do we own?
Some food, it's an inventory of food, isn't it? So, $750 will be the value of our
inventories at the end of December.

Apart from this, and if it were your business, I think you would check before the
Christmas break, how much cash is left in your wallet. So, how much? We started
from scratch. Look at the cashflow statement. We started from scratch, cash
beginning zero, plus $5,000 of cash that came in minus $750 that came out when we
purchased the food.

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So, it means we're left with $4,250 of cash in our wallet. And again, that's something
we own. So, it must appear on the assets side of the balance sheets. And you see
here, that is a strong link that already appears between the cashflow statement and
the balance sheet of the company.

The bottom line of the cashflow statement, that is how much cash is left on the bank
account or in the wallet of the company at the end of the period, is systematically
going to be recorded as an asset in the balance sheet at the end of the months. And
you see in the end, the total of the assets matches the total of the liabilities and
equity $5,000 on both sides, it looks like I made no mistake.

Now, please proceed to downloading the excel template for the month of January,
give it a try, try to fill in the numbers, and afterwards, we're going to reconvene for a
debrief together.

Video 2:
Let's debrief the January operations. What happened in January? While in January,
we started to produce and sell our Pizzas. So, we needed a truck, and we decided
that we would rent this truck, that will cost us $2,500 every month.

How many Pizzas have we sold in January? 500, at $10 selling price each and all of
our customers paid in cash when they came to the truck and got the pizzas
delivered. Besides the truck rental costs, we also had to bear a couple of additional
expenses, namely the material costs $1.5 of food involved in the production process
of the Pizzas and 50 cents of water and electricity.

So, let's recognise these operations into the financial statements of the company for
the months of January. And you see that now on screen, not only do we have a
cashflow statement and a balance sheet as we had in December, but we also have
an income statement.

Yes, the sales activity started in January. So, it's interesting to look at whether we
made money or not, and measure our profits. In order to be able to compute that
profit, we'll need a production costing table. You'll see why in a minute.

So, let's fill in the statements. Let's not do it in a leaner format that would be boring,
and that wouldn't show well, the translation of your decisions of our decisions into

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the financial statements. So, let's think about what happened during the month of
January.

First thing, we probably did when we started the business in January was to check
how much cash was there in our wallet at the beginning of the month. If you forgot
about that number, then please go back to the balance sheet at the end of
December, that says how much cash we had left end of December, $4,250.

That's exactly where we stopped from in January, nothing is created, nothing is lost
in accounting. What else do we inherit from the December balance sheet? Surely,
the share capital of the company. Remember, shareholders injected $5,000 in the
company in December, and we said, we now owe that money to shareholders.

Nothing changed in January. So, we still owe that money to the shareholders for the
same reasons as in December, we still have a debt, vis-a-vis these people. This being
said, we can start to produce and cook Pizzas. It will be $1.50 of food involved in
every Pizza.

Where will the food come from? We don't go back to the supermarket this month. What
we will do instead is use the inventory we have stored in December. Remember, we had
stored food for $750 in December. How much are we going to use out of that in
January? Well, 1.5 times 500 Pizzas produced that's exactly $750.

So, we're going to use up 100% of the inventories we had built in December. And we can
already write in the balance sheet at the end of January, that the inventories will be
equal to zero because nothing will be left out of the inventory, we had previously built.

What's next in the production process? Water and electricity, 50 cents times 500 Pizzas
produced, that's $250 and it is a cash outflow in January, we do have to pay our bills.
How much does it cost to produce one Pizza?

Well, $1.50 of material food plus 50 cents of water and electricity, that's $2 of
production costs per pizza and that represents $1000 for 500 Pizzas produced. So,
$1,000 is the production costs of all my Pizzas and all these Pizzas will get sold. So, this
$1000 will also be the cost of the goods I'm selling this month.

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In the income statement, we previously said that the costs must match the revenues.
So, the cost of goods I must recognise is the cost of the goods, I truly sold. By the
way, regardless of when did I pay for the food and the water and electricity bills? I
don't care at that point.

What I care about is how much did it cost me to produce the 500 Pizzas, $1000. So,
that's the cost of the goods I'm selling now. Other costs involved? Yes, the rental cost
of the truck. So, minus 2,500 in the income statement and also minus 2,500 in the
cashflow statement, because I again do have to pay my bill.

Lastly, we're selling those Pizzas. So, we sell 500 Pizzas, that's $10 each. Mind you, it's
a very nice business to be in. We sell Pizzas that's only costs us $2 to produce for $10
each, very good business. And the sales revenue is pretty high, $5,000. The sales
revenue it's systematically.

How many goods did I sell times the selling price of the same goods? So, here, $5,000,
that's my sales revenue in the income statement, and it's also the cash inflow that
comes in the cashflow statement because all customers pay in cash.

So, I think we've finished to describe the operations. Now, we can compute how much
cash is left in our wallet at the end of the month, that will be the bottom line of my
cashflow statement, same process as we had in December, you do the math and you
find that real left with $6,500 of cash at end of January. And again, we have this link
between the cashflow statement and the balance sheet, how much cash is left in my
wallet at the end of January is something that company owns. So, it must be recorded
as an asset on the balance sheets.

Last question, did we make money in January? Yes, we did. The sales revenue was
5,000 minus cost of goods sold $1,000 minus truck rental costs $2,500, that leaves us
with a profit of $1,500.

This profit is whatever is left after paying everybody involved in the business, the
suppliers, the workforce, if ever I had any workforce, which I don't have yet, but you
know whoever has been involved in the business, has already been paid, when I am
dumb, the level of the monthly profit here at the very bottom of my income
statement.

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So, who does these profits belong to? Well, actually you have an indication. If you
look at the balance sheet. In the balance sheet, you're invited to record that profit
on the liability side, and that gives you an indication because actually these profits
belong to the shareholders. Yes, everybody has been paid except the shareholders.

So, whatever is left, if something is left, because remember the company could be at
a loss as well. Whatever is left, belongs to the shareholders. Profits do belong to
shareholders. I know it may sound a bit counterintuitive to some of you, but think
about it.

If it were your own food truck, and if you wanted to stop the business at the end of
January, what would you do? Well, you would probably look at the balance sheet and
say, look, what do we have in that company? Well, there is only cash, $6,500 in the
wallet. What would you do with that cash?

I bet 100% you would take them with you and you'd be right to do so because that
represents the initial share capital invested plus the profit of January. So, somehow
that's an evidence that profits belong to shareholders you know.

If it were your business, you would consider it your profits. In large corporations, it's
exactly the same reasoning. The profits belong to the shareholders because the
profits represent whatever is left after paying everybody involved in the business.

Video 3:
In January, we did make money by selling 500 pizzas, we managed to generate a
$1500 of profit, very good news, but what we would like to know is what is the
minimum number of pizzas we need to sell in order to start to be profitable?

Because, of course, if we had sold no pizza, we would have been at a loss. If we had
sold no pizza, the sales revenue would have been zero. The cost of goods sold would
have been zero as well, because we would have sold no pizza.

However, the truck rental cost would have remained. This truck rental cost is what
we call a fixed costs. Its amount does not depend on the quantity sold. $2,500 of
fixed costs and the name of the game, of course, is to sell as many pizzas as

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possible to offset this truck rental costs, because every time we sell a pizza, what
happens?

Well, we sell it for $10, that’s the selling price and the variable cost of production of
that pizza is only $2. We sell something for $10 that only costs us $2 to produce. So,
every time we sell one pizza, we make a margin of $8. $8 is the variable margin per
unit and we understand that the more pizzas we sell, the better we can offset our
fixed costs. $8 plus $8 plus $8 plus $8 dollars of margin at one point that will help us
offset fully the fixed cost of $2,500 dollars.

So, question. How many times do I need to do this margin of $8 to be able to

recover my fixed costs? Well, let’s do the math together. $2,500 dollar of fixed costs
divided by $8 margin every time I sell a pizza; it means I have to sell 313 pizzas. The
break-even point is the minimum number of pizzas that I need to sell before
becoming profitable.

Video 4:
January is over. So, let's move on now to the months of February. In February, we
keep on doing business pretty much the same way as in January, but sales, all sky
rocketing.

In February, we managed to sell 1000 Pizzas to individual customers who come to

the truck and pay in cash upon delivery of the Pizzas, but we also managed to close
a deal with a neighbouring company for 2000 Pizzas to be delivered during the
month of February, but to be paid by customers one month later, 30 days after the
delivery of the Pizzas.

However, the selling price remains the same. We keep on renting the truck at $2,500,
and the production process of the business is unchanged. $1.50 of food plus 50 cents
of water and electricity involved in the production of every pizza.

When you thing, though, in order to be able to cope with such a fast growth, we
decided to hire a part-time employee that did cost us $1000 during the month of
February. And you may remember that we had left our inventories empty at the end
of January.

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So, we definitely needed to go back to the supermarket in February. We went back
to the supermarket and purchased food for $5,000 in February. That must be
enough to cover the February sales, and there may even be some extra foods
leftover. The flour is yours, try it, try to fill in the financial statements for February,
and then we reconvene for the debrief.

Video 5:
Let's debrief now, the February financial statements. I hope you had good fun trying
to fill in the numbers, but you may also have felt a bit uncomfortable with some of
the numbers. So, we're going to think about them together. Ask ourselves the right
questions, so as to set the basic principles in accounting that we need to solve such
situations.

For sure, we will be far above the breakeven point. So, it will be very much profitable
this month. But before we get that and can discuss the performance, we need to go
step by step and fill in the statements.

So, first things first, what do we inherit from the end of the month of January? How
much cash do we have in our wallet beginning February? Exactly as much as on
January the 31st, that was $6,500. We also still own the share capital to the
shareholders $5,000. And the profit we made in January was retained inside the
business, and therefore, became what we call retained earnings that we still owed to
the shareholders for the same reasons as in January.

So, we can already fill in two lines in the balance sheet, namely the share capital and
the retained earnings. Then, we can start to think about doing business. And I would
like this month that we start with the sales revenue.

The key question was how much is the sales revenue in February? And typically, shall
I compute it based only upon the Pizzas I sold in cash or shall I also include the
2000 Pizzas sold on credits? There is a question here, it may not sound obvious to all
of you.

However, if I asked you how many Pizzas did, we sell? Sure, you're going to tell me
3000, and you'd be right to say so. Why did you say that we sold 3000 Pizzas?
Because actually 3000 Pizzas became the property of our customers, and that's
what decides when a sale is actually realised.

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Okay. So, the realization of sales principle in accounting will tell us that in the sales
revenue, we should include all the goods or services that have become the property
of our customers during the period considered, regardless of whether the customer
has paid us yet or not.

But the thing is 3000 Pizzas moved out of our inventories, became the property of
customers; therefore, we're entitled to cash in the corresponding sales revenue. So,
the sales revenue in the income statement must be $30,000, based on the number of
Pizzas is truly sold.

Then, you may ask yourself, but I didn't cash in $30,000. So, I'm going to have a
problem. How can my balance sheet stay balanced if I'm recognised 30,000 in the
sales revenue, in the income statement and 10,000 only in the cashflow statement
for sales in cash? Where are the 20,000 outstanding going to appear?

Well, what do these $20,000 represent? If you think about them, they represent the
amount of money customers owe us. This money needs $20,000 belong to us. The
Pizzas are no longer ours, but the $20,000 are ours. So, it's something that we own.
It's cash that we own, but that is not yet in our pockets.

And this does have a name in finance. We call them accounts receivable. So, actually
my sales revenue is going to split into two; 10,000 will be cash inflow in the cashflow
statement, and 20,000 will be accounts receivable on the assets side of the balance
sheet. The rest is a little easier.

We need to take care of the production process of the Pizzas. To do that, of course,
we need to go back to the supermarket first, purchase food for $5,000, so that is a
cash out in my cashflow statement, and how much of that food will be used at
production level?

Well, $1.5 for every pizza times 3000 Pizzas produced. It means that at production
level, I'm going to use $4,500 worth of food. How about the excess $500 of food I've
purchased? Well, I plan to store it, keep it in the fridges until the month of March. So,
end of February, I will recognise these extra $500 as an inventory in my balance
sheet.

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My inventories were empty end of January, and now, they increased by $500
because this is the excess food I just purchased. What's next step production level?
Water and electricity, 50 cents, times 3000 Pizzas, that's $1,500 and I must pay my
bills. So, it will be a cash outflow in the cashflow statement.

Production cost per Pizza remains constant $2, but now multiplied by 3000 Pizzas, it
means the cost of the Pizza is truly sold this month. The cost of the 3000 Pizzas I
previously plugged in my sales revenue will be 3000 times $2 per Pizza, that will be
$6,000 dollars.

Additional costs incurred. Yes, the part-time employee and the truck rental costs.
These are both costs in the income statements and cash outflows in the cashflow
statement. And where I am? Then, with the recognition of the operating items that's
occurred during the month of February, I'm just left with computing, how much cash
do I have at the end of the month in my wallet?

I'll let you do the math. And I bet you're going to find $6,500. So, this is again,
something I must record on the asset side of my balance sheets. And profit-wise, did
we make the expected profits given the huge amount of Pizzas as we sold? Yes, we
did. The profit of February is $20,500.

Again, this one belongs to shareholders, so it must be recorded on the liability side
of the balance sheets and good piece of news my balance sheet is balanced. Total
assets are equal to the total of the liabilities. So, well-done, we've completed the
computations for the month of February.

Video 6:
We've introduced three important principles. The first one is we ask ourselves, what
do the retained earnings represent? Retained earnings whenever you see them
appearing in balance sheets, retained earnings represent the cumulated profit and
losses made by the company since its creation and not yet distributed in the form of
dividends.

So, in our case here, that was only the profit of January taken into February. But
assume, we were going to move on too much, very quickly, and the retained
earnings of March will be equal to the profit of January plus profits of February,
because we're not going to distribute any dividends and so on and so forth.

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The second important principle we discussed is the realisation of sales principle. This
is fundamental in accounting. Sales should be recognised in the sales revenue as
soon as goods or services become the property of the company's customer. Usually,
it is upon delivery, but that must be checks depending on the contract you've signed
with your customer.

Lastly, don't forget about the prudence principle that was really treated in our case,
but that needs to be mentioned. The prudence principle states that in a balance
sheet, one should never overvalue the assets or undervalue the liabilities.

Here, we could have had a question regarding the inventory. How to value the
inventory properly? We decided to value them at costs at purchasing price, suddenly
not at the future selling price of a hypothetical Pizza, I could sell in the future,
because there's no guarantee I can transform this food into a Pizza that I can sell
for $10 later.

So, I stayed conservative and recorded my inventory at the purchasing price, that
was the most conservative value I knew by that time. Now, the computations for
February are done, but it's no funny if we don't ask ourselves, how do we judge the
performance of that foot track?

Are you happy about the performance? Are you worried? Do you have mixed
feelings? Can I let you think about it? Give it a try and discuss it, and we'll come
back for a debrief soon.

Video 7:
How do we feel about the performance in the month of February? Of course, on the
one hand, we are very excited because the profit was so high, $20,500. That's
outstanding. We sold 3000 Pizzas that was far above our breakeven point, even if
the amount of fixed costs has increased a bit, because we just hired an additional
employee, but the profit was outstanding, you know that.

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However, I have mixed feelings because on the one hand, the profit was very good,
but on the other hand, cash wise, things weren’t as good. How much was the
cashflow in February? Actually, the cashflow of February is the difference between
the cash left at the end of the period in my wallet versus the cash I had in my wallet
at the beginning of the period.

The cashflow is the additional amount of cash I have in my wallet at the end of the
month, and how much does it in February? It's just zero. I have no more cash in my
wallet at the end of the month, then at the beginning of the month, cashflow is zero.

And this isn't really good news. It's very good to be profitable. That's the number one
thing to achieve. But the name of the game is not only to be profitable, but to be
able to translate profits into cash. See, shareholders, bankers, your company's fund
holders, they are injecting cash inside the business.

So, what do they expect in return? Well, they expect cash to be generated, so that
they can take your cash reward for them in the end. So, bank shareholders would
probably have mixed feelings when looking at the financial statements of the month
of February, and they would ask how come the cashflow was zero. They would
challenge this point.

They would ask you, where is the cash? It's not in your wallet. So where is it? And the
answer is, well, it is in two places. A bit of it is in the inventories. Inventories have
gone up by $500 because we've purchased excess food, unnecessary food. So, we
burned cash to grow the inventories.

That's not really good news. Is it a big deal? Well, honestly, $500 was a food isn't
much as compared to the entire food utilised during the month of February. So,
okay. We can let this go. And then there is a bigger chunk.

The bigger chunk of where is the cash is, the cash is at the customer is at the B2B
customer because this customer has not paid us yet. And that raises, I think, two
questions first, a liquidity question. Is this customer going to be solvent? Do you
think he's going to pay us next month or not?

Because $20,000 is a lot of money. So, if we assume yes, if we assume that was a
serious customer, we can say, okay, liquidity wise, that will be fine. But then there is
a second question, which is, well, look to do business with this B2B customer, we
need $20,000 more to back the business, to finance the accounts receivable.

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So, if we use more assets, i.e., if we use more money from shareholders, bankers,
potentially to purchase these $20,000 worth of accounts receivable, the key is are
we able to generate more profit out of that? You use more assets, it means that
must be backed by fund holders, shareholders, all bankers in our case, it's so many
shareholders.

So, is that likely to generate more profits, to satisfy the return expectations of the
fund holders. And here, what do we think? Well, we think yes, in the end. True, we
require a lot more attached to back the business, but look at how profitable this
business is.

Don't forget that every time we sell a Pizza, we make a profit of $8, which is 80% of
the selling price of the Pizza. That's a huge profit. So, it was truly worth it. This deal
with the neighbouring company was truly worth it, though, it requires a lot more
cash to back the business.

So, in the end, we have a fair justification of why the cashflow is a zero it's because
the nature of the business is changing a bit. We're doing B2B business now, and it's
because the sales are ramping up fast and funding growth does require additional
money. But it's highly profitable, so we can let it go, and in the end, I would say that,
yes, I am happy.

Video 8:
Let's move on to the month of March. In March, we decided to change a bit the way
we're doing business. We decide to stop to rent the truck, but we wanted to buy it
now. And we've found a nice truck that we could buy for $36,000 to be paid half in
March, half in April. It's a track that we can keep over three hours.

Apart from that, in the day-to-day operations, what's going to happen? We're going
to go back to the supermarket and purchase food for $5,000, that's going to be
necessary to run the business in March. Remember, we had left $500 worth of food
at the end of February. That's certainly not enough to cover the production needs in
March.

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So, we definitely need to go back to the supermarket. Then, we're going to sell 3000
Pizzas again, 1000 Pizzas on cash plus 3000 Pizzas on credit with the same payment
terms as last month. The selling price of the Pizzas were remained the same $10 per
unit, and the production process will be unchanged $1.5 of food plus 50 cents of
water and electricity in every Pizza.

We will keep the employee we hired in February, and that will cost us a $1000, and
because we now own the truck, we need to sign an insurance contract, so the truck
insurance costs will be
$300 this month. Would you please be able to complete the financial statements for
the month of March?

Video 9:
Let's debrief the March numbers. I don't really plan to go through each and every
number because I suspect you did a very good job on most of them, but there is one
point that probably raised questions or uncertainties. How do we deal with this truck
that we are purchasing?

So, how to consider this truck? We buy it. If we buy it and we plan to keep it over
three years, it means that at the end of March, it must be an asset in our balance
sheet because now we own it. We have not consumed it fully during the months of
March, it will take us three years to use it fully.

So, that must be an asset for that. And this is this line in, on the balance sheet, gross
track value. Here, we record the truck at its purchasing price, $36,000. And we said,
we'd pay half of that in March, so there is a cash outflow in March for $18,000, and
the other half is to be paid in April, which means in the balance sheet at the end of
March, we must recognise that we still owe $18,000 to the truck supplier.

That's for the recognition of the purchase of the truck. Then, how about the use of
the truck? Well, it's a track I'm going to use over 3 years, 36 months. So, if I wanted
to respect the matching principle, if I want my costs to match my revenues, then it
makes sense to spread to my truck, to spread the cost of my truck over the entire
estimated duration time, over the upcoming 36 months, $1,000 every month, and
that's what we call depreciation.

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Depreciation represents the spread of the value of an equipment throughout its
forecasted useful lifespan. There are some standards in accounting that will tell you
how fast you're allowed to depreciate this type of item, the other type of item. You
will ask your accountants, your CFO's real life, and they will tell you what to do.

So, depreciation must be recognised as a cost in the income statement. It

represents the use of the truck, the use of a fixed assets generally speaking, during
a period of time. That's what depreciation is. A cost and operating costs because it is
linked to operations in the income statement.

What depreciation isn't, depreciation isn't a cash outflow. There is no cash outflow
links to depreciation who would you give that cash to? Nobody has a claim on that
cash. It's not a cash outflow.

The corresponding cash outflow happened at the time of the purchase of the
equipment, half in March, half in April, and that's it, we gave that money to the truck
supplier, but so long as you use the truck falls up to six months, you won't have to
give money out to anybody.

So, depreciation is a costing the income statements, but depreciation is not a cash
outflow. Back to our accounts, how is that going to come into play? As I just said in
the income statement, I will have a new line, track depreciation to take into account
the cost to use the equipment.

It's a bit as if I were saying I'm using in March 136th the fraction, 136th of the value
of my equipment. And next in the balance sheet, I will say, look, I initially purchased
this truck for $36,000, but I already used 136th of it, a $1000 dollar.

So, the value that I still have to use in the upcoming 35 months is only $35,000. And
that's it. I've taken into account the purchase of this truck, which is a piece of
property plant and equipment that we often call a fixed assets in finance, in
accounting.

What is a fixed assets? It's a tangible or intangible item that I purchase, I own, and
I'm planning to use over several periods of time, something I'm not going to

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consume in only one period, but that I will keep for several periods of time. And
therefore, it must be capitalized in my balance sheet appear as fixed assets.

That was a second new thing in the March accounts that may have raised some
questions. It's in the balance sheet on the liability side, it's called owner's equity.
What's that? What is owner's equity? Well owner's equity appears in any balance
sheet that you may have a chance to open in the future.

Owner's equity is a subtotal on the liabilities and equity side of the balance sheet,
and actually, it represents all the money that belongs to the shareholders in the
company. So, it includes the share capital $5,000. It includes the retained earnings.
So, the past profits accumulated so far and kept inside the company, $22,000 in our
case, which is the sum of the profits made in January plus the profit made in
February.

And as well, the profit of March that also belongs to the shareholders. So, that's what
owner's equity is the sum of these three items, and it's a subtotal in the balance
sheet, which means if you want to compute the total liabilities and equity, you can
do it by taking the owner's equity, plus the debt to the truck supplier.

Video 10:
We were now coming towards the end of our exercise. April will be the last minutes
we covered together, and the last month, we asked you to complete the financial
statements for. What happens in April?

Of course, we keep on using the track we purchased in March. We have to go back to

the supermarket. We purchase food for $5,000 once more. How many Pizzas do we
sell this month? Where there is a bit of a change here.

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This month, we decided to stop to do B2C business, but we only want to do B2B
business. So, we only sell Pizzas to the neighbouring company, and we sell 4,000
Pizzas to these neighbouring companies.

The selling price is the same $10 per Pizza, but the payment terms have changed.
We're doing more business with them, but they asked us to drag them longer
payment terms. So, they will only pay us two months after the delivery of the Pizzas.

In terms of production process, nothing changed, $1.50 of food plus 50 cents of

water and electricity in every pizza. The part-time employee is still there with a cost
of a thousand dollars every month, and the truck insurance still costs us $300.

So, please, would you be able to fill in the financial statements and think about the
performance achieved this month? Again, do you feel happy or do you have mixed
feelings or are you even worried?

Video 11:
Here are the numbers for the month of April. Let's have a look at them. Let's ask
ourselves, how do we judge the performance all at some points we'd like to
challenge the management team with? If we want to analyse the performance, I
think the first thing we're going to do is look at the profit achieved.

Profit wise, what happened? Well, the profit increased by $8,000 as compared to
much, which is very much understandable. Indeed, we sold 1000 more Pizzas, and
we all know that we make a margin of $8 every time we sell one more Pizza.

So, if we sell 1000 more Pizzas, we make an additional profit of $8,000 provided that
the fixed costs remain and changed. So, profit-wise, we do understand what
happens. Let's have a quick look at the balance sheet as well. Do we see anything
striking us in the balance sheet?

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Let's look at the asset side. On the asset side, what do we notice? The truck loses a
bit of its value. This is because we keep on depreciating it, makes sense. The
inventories are going down, down by 1000. Very good news. We sell from inventories.
We clean up our inventory is good news.

And as far as the accounts receivable are concerned, well here, there is a bit more of
a worry. They used to amount to $20,000. Now, they amount to $40,000. It's a sharp
increasing the accounts receivable. Customers are the customers now owe us
$40,000. That's a lot of money. Isn't it?

And of course, it's a lot of cash that that is not in our own pockets. So, that makes
me feel like we should have a look at the cashflow statement, try and see the
cashflows generated this month. So, let's have a look at the cashflow statement.

How much was the total cashflow this month? Well, the total cashflow generated by
the company is negative. See, we closed the month with less cash in our wallet than
we had at the beginning of the month. So, the cash flow was negative 6,300 dollars,
bad news. I’m just doing the difference between the cash at the end and the cash at
the beginning of the period, bad news.

There is something I need to challenge here. I need to understand I'm not judging. I
don't want to jump to conclusions, but I want to understand what happened, and
see here, my cashflow statement starts to become a pretty long, so it's not so
convenient to analyse.

So, maybe and I should start to consider to sort out the different items into the
three categories we spoke about at the very beginning of the course. Remember, we
said we could sort out the cash items into operating activities, investing activities,
and financing activities.

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So, let's do that to together. In operations, what are we going to do? What are we
going to plug in? The operations, it's my day-to-day core business to short collecting
receivables left at the end of March is part of the operations.

Collecting cash from sales meeting cash is also part of the operations, but here it's a
zero. I do no business in cash, but just in food for production purpose, that's also
part of operations, paying my water and electricity bills. Again, this is operations.

Paying my part-time employee that's operations and paying the truck insurance is
also part of the operations. So, I'm able to compute the cashflow from the
operations, and that will help me understand, did the operations generate cash or
not?

So, here, we do the math, and we find the cash flow from operations is equal to
$11,700. So, operations did generate cash. That's a good signal. Okay. The company
is growing fast, is doing more and more business on credits. Still, it manages to
generate cash from operations.

So, where is the problem? Remember, we said the cashflow was negative and that
was worrying. And obviously, the problem doesn't lie in the operations. They
generated a positive cashflow. That's the problem lie in the investments.

What would we plug in the cashflow from investments? For sure, the end of the
payment of the truck purchase $18,000, and that's it. So, the cash flow from
investments will be negative $18,000. Financing activities related to my relationships
with bankers or shareholders. Do I have any here? Well, I don't think so.

If you look at the cashflow statement, we've already taken into account all the
items. So, the cash flow from financing activities is a zero and see we can
reconstitute the total cashflow of the company by adding together the cashflow

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from operations, plus the cashflow from investments, plus the cashflow from
financing activities.

And again, of course there is no magic. We find minus $6,300. There's no magic
because we just rearranged the items, the same items into different categories, but
that is a lot more helpful for our analytical purposes because now I understand why
the company is in that situation.

Operations, yes, did generate cash $11,700, but that was not sufficient to pay for the
investments. The company was not really able to self-finance its investments,
operations didn't to generate enough cash to pay for the investments that will
enable the company to grow in the future.

So, this is where the problem lies, and that gives me a fair view of what happens in
the company. For the time being, it is still a startup, not able to self-finance its
investments, and that's why the cash position is much lower at the end of the month
than at the beginning of the months.

So, of course, the next question to the management team is what are your plans for
May, June, July and so on and so forth? And they're likely to tell us, look, we don't
have any major investments planned. So, the cashflow from investments in the
upcoming months will be zero.

Hopefully, our customers will pay us very fast beginning May, and we'll be able to
keep on doing business and generate more and more cash from operations in the
upcoming months. So, the story will be back on track very quickly, if not in May,
maybe in June or July.

And if we're convinced, then, we'll give them a go, and they can keep on managing
the company. Overall, it's a company that has achieved a pretty outstanding
performance over only four months of operations.

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I hope that was good fun for you, that was a short introduction of the important
accounting principles that we all need to master, and we're going to use that to go
deeper in the analysis of their statements now, and also use the statements to
compute some key metrics and to understand better the operating levers we can
pull to boost the performance further.

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