Let's start with a simple case, The Garden Spot. It's about the first year of operations of this small company that has recently been started by Mary Jo. This is where we get to the fun stuff. This is accounting in action. We're going to spend a lot of time doing a lot of work. But we're going to see the rewards of all of the work that we've put in when we get to the end of the year, and can sit back and reflect, as a manager, on what happened in this company during its first year. This case is on the course site, so if you haven't read it, take a few minutes, download it, read through it before going forward. Just to review what happened in The Garden Spot. Mary Jo started The Garden Spot on January 1st. She's now reached the end of the year, and she needs to record transactions to capture the effective things that happened in the business during the year. After she's done that, she will prepare financial statements for the year, an income statement, a balance sheet, a statement of cash flow. Then she can sit back, reflect on them, think about how the first year went, how well she did, and what she'd like to do differently moving forward. Recall the financial statement framework that we've introduced. Let's apply that to The Garden Spot. On January 1st, Mary Jo, as the manager and owner of The Garden Spot, did several things. She issued stock, the company issued stock to Mary Jo and her husband Josh, in exchange for cash. The company obtained a loan to get some additional financing. It bought some equipment, it bought a truck, so it could be ready to go. Throughout the year, the company purchased inventory. Inventory of plants and shrubs and things like that to sell to its customers. It sold that inventory to its customers, it incurred some operating costs/operating expenses, and it made a payment on that initial loan. All of these things are transactions that Mary Jo needs to record in the books. Then at December 31st, she's ready to prepare the financial statements after she's recorded these transactions. But before she can do so, she'll just need to make a few adjustments to a few accounts before she prepares those statements. These adjustments will be things we need to do because of accrual accounting. They usually result as the passage of time. An example is recording the cost of using equipment by recording it an expense. Don't worry about that now, we'll get to it, we'll learn how to do that. After she's done that, she'll be able to start preparing financial statements. She'll prepare a balance sheet for the end of the year. That will be her snapshot about the financial position of the company on December 31st. She'll see her assets, her liabilities, her equity accounts. She'll be able to take stock of her financial position. Of course, she could prepare a balance sheet at the beginning of January 1st before anything had happened. But balance sheet wouldn't show any assets or wouldn't show any liabilities, and it wouldn't show any owners' equity. But that's only because this is her first year of operation, and that beginning balance sheet would be constructed before any actions had been taken by the company. Then Mary Jo will prepare an income statement, that will show the revenues and the expenses and consequently the net income or net earnings of the company. It will capture the results of the operations over that 12 month period, over that first year. And she will also prepare a statement of cash flow, so that she can asses the change in her cash balance from the beginning of the year, which was zero, to the end of the year. To see how things went there. Now remember, these two financial statements, the income statement and the statement of cash flow, provide two very important video-like understanding of what transpired between the beginning of the year and the end of the year. The income statement will help Mary Jo understand how her retained earnings balance changed from the beginning of the year until December 31st at the end of the year. She'll take her beginning retained earnings balance, she'll add in the earnings that she generated during the year. If she pays out any dividends to her owners, then she would subtract that, and she'll arrive at her ending retained earnings balance. That statement of cash flow also will give her an important understanding of the change in a balance sheet account. It will outline the change in cash in the organization and help her understand how she went from the very beginning cash balance, at the beginning of the year, to the cash balance at the end of the year. And understand what transpired to make that change happen. So this framework is one where we can think of as a help to Mary Jo, as she starts to prepare her financial statements. She'll record her transactions, prepare the statements then she'll have the set of statements that we can look at in the framework. And we can sit back, reflect, assess how it went that first year and help Mary Jo think about what to do next.
