Video transcript
Let's see if wecan use our example to understand the threetypes of income statements, and hopefully understandingthose income statements will also help usunderstand this example. So I'm going tostart off-- we're going to focus on month two. And what I havedone is I've just rewritten some of this accrualincome statement down here. So it really lookslike a statement. So this right here isthe income statement for month two onan accrual basis. In that month, wesaid we had $400 of revenue, $200 of expense. 400 minus 200 givesus $200 of income. An income statementtells us what happened over a period of time. What was the activity-- howmuch revenue, how much expenses, and other things. This is just asuper simplified one without taxes, without interest,without other types of expenses over here. I also have drawn the balancesheet at the end of month one and the balance sheetat the end of month two. Or you could also viewthis balance sheet here as the balance sheet atthe beginning of month two. And the main thing to realizeis income statement tells you what happens over a timeperiod, while balance sheets are snapshots, or they're picturesat a given moment-- snapshots. So this tells usessentially what did I have. The assets are the things thatcan give me future benefit, so what do I have. And the liabilitiesare things that I have to give future benefitto, or things that I owe. So this is what I have. This is what I owe. And then the equity is whatI really have to my name if I net out theliabilities from the assets. So at the beginningof month two-- which is the endof month one-- I had $100 of cash, noaccounts receivables. I didn't owe anyone anything. I didn't owe them money. I didn't owe them services. So 100 minus 0 means I had $100. That's kind of what theowners of the company can say they have of value atthe beginning of the month. You fast forward-- nowat the end of month two-- I now owe the bank $100. So I just put this asnegative $100 here. It normally wouldn'tbe accounted that way on an actualcompany's balance sheet, but this is simplified. But I have an accountsreceivable of $400. So my total assets noware $300 of assets. And remember,accounts receivables are an asset becausesomeone owes me something. Someone owes mecash in the future. I still have no liabilities. So you take all of your assets,minus all of your liabilities, and now I have $300 in equity. So you can see thesnapshot at the beginning of the month, 100 in equity. Snapshot at the end ofthe month, 300 in equity. And so to go from onepoint to the other, to go from 100 to 300, I musthave grown in equity by 200. I must have gotten $200 worthof value from someplace. And that's what the incomestatement describes. It describes it right over here. The change in equity,sometimes it's the change in returned earningsor just change in equity. That is going to bethe $200 in net income that the company gotover that time period. Now, there's one thingthat you're probably confused by right now. It's like, well, how dowe reconcile everything with the cash? We know that over thisperiod we got $200 in income on an accrual basis. But when you lookat the cash, we went from $100 positive cash,to negative $100 in cash. It looks like we lost $200. So how can we reconcile thefact that we got $200 in income? How can we reconcilethat with the fact that we lost $200 in cash? And that reconciliationis going to be done on the cash flow statement. And I'll do thatin the next video.
