Analysis of Financial Statements: February

In the previous segment, you saw how the operations in February translated into the financial statements of the pizza food truck business. Let’s recap our learnings so far.

Key learnings:

• Retained earnings represent the cumulative undistributed profits or losses of a  company since its inception.

• Sales should be recognised in the sales revenue as soon as goods/services become the property of the company’s customer.

• In the balance sheet, assets should not be overvalued and liabilities should not be undervalued. This is known as the Prudence principle.

• Inventory should be valued at 'purchasing price' or 'market value', whichever is lower.

But here is the key question: Do you think the company performed well in February?

In the upcoming video, our faculty member, Marie-Lys, will analyse the performance of the pizza food truck business for the month of February. 

In this video, you saw that in February, the pizza food truck business had made a profit and was operating above its break-even point. However, the cash flow generated during the month was 0 (zero).

On analysing further, you saw that the majority of the cash is blocked in ‘Accounts receivable’ and ‘Inventory’. The cash flow is 0 due to two reasons;

• The nature of the business was changing

• Growth required additional funding

In such situations, it is important to further understand the following 

1. The solvency status of the customers in order to avoid losses in future

2. The ability to procure additional funds to finance the accounts receivable and subsequently generate more profits using these additional funds 

Since the business has a high variable margin, the ability to earn profits is very high. Overall the business seems profitable and the performance seems satisfactory.

In the next segment, you will learn about indirect costs in detail.