How to Read a Financial Report: Wringing Vital Signs Out of the Numbers

Chapter 4. SALES REVENUE AND ACCOUNTS RECEIVABLE

Exploring One Link at a Time

Please refer to Exhibit 4.1 at the start of the chapter, which shows the connection between sales revenue in the income statement and the accounts receivable asset account in the balance sheet. This exhibit is taken from Exhibit 3.1 in Chapter 3. Exhibit 3.1 presents the big picture; it ties together all the connections between the income statement and the balance sheet. This chapter is the first of many that focus on just one connection at a time. Only one line of connection is highlighted in Exhibit 4.1—the one between sales revenue in the income statement and accounts receivable in the balance sheet.

Friendly Reminder: In Exhibit 4.1 (and all those exhibits to follow in the coming chapters) the income statement and balance sheet are stripped of subtotals. For example, the income statement is a single-step statement, meaning that no lines are shown for gross margin and other intermediate measures of profit. Likewise, in the balance sheet no subtotals are shown for current assets and current liabilities and for the amount of property, plant, and equipment less accumulated depreciation. Excluding subtotals gives us lean and mean financial statements to work with.

Another Friendly Reminder: Exhibit 4.1 does not include the company's statement of cash flows for the year. The connections between changes in the balance sheet accounts and the cash flows statement are explained in Chapters 13 and 14. The cash flows ...