To help you understand the importance of cash flows in the operation of a small business.

Think about operating a business like the Millers did when they created the Bold City Brewery. Your business is called BCS Consultants, Inc. You just received your year-end financial statements from your CPA and you notice one very disturbing item. The net income from your income statement shows $36,000! Your very first thought is ?where is it?? Then you look at your cash balance and see that it decreased $8,000 from last year to this year. You?re thinking there has to be something wrong here. So, you call up your CPA and ask for a meeting to discuss this obvious error. After all, how can you possibly have a positive net income and have your cash balance decrease?

At the meeting, the CPA lays out the financial statements in front of you and begins to explain how this would have happened. Following are a condensed income statement, statement of retained earnings, and balance sheet:

Requirement

By looking at the three financial statements, can you anticipate what the CPA is going to tell you about why the cash decreased even though you had net income for the year? What changed from 2017 to 2018? Are transactions that affect the income statement the only transactions that affect your cash balance?

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BCS Consultants, Inc. Income Statement For the Year Ended December 31, 2018 Total Revenue $142,000 106,000 $ 36,000 Total Expenses Net Income BCS Consultants, Inc. Statement of Retained Earnings For the Year Ended December 31, 2018 Beginning Retained Earnings $ 84,000 $ 36,000 (15,000) Net Income 21,000 Dividends Paid Ending Retained Earnings $105,000 BCS Consultants, Ino. Balance Sheet December 31, 2018 & 2017 2018 2017 Assets: $ 30,000 158,000 $188,000 $ 38,000 146,000 $184,000 Cash Equipment Total Assets Liabilities: Notes Payable Bank Stockholder's Equity: Common Stock $ 58,000 $ 75,000 25,000 105,000 130,000 $188,000 25,000 Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity 84,000 109,000 $184,000