[MUSIC] Okay so we're starting to build up a picture of the accounting concepts and sort of the ideas that sit behind the statements that you're expected to produce for your business plan. Let's have a look at an example. Let's have a look at Genius Ltd. It's a limited liability organization of the world itself, a limited company and it buys and resells IT applications. During the first financial year, this is what happened. Number one, they issued 100 ordinary shares and they had a nominal value of one pound each. And they issued them for one pound in cash. Okay, what does that mean? What that means, is the ordinary share capital the ownership of you wish of the business was divided up into 100 parts, 100 ordinary shares. These had a nominal valued, some often referred to you may see the term par valued of one pound each. This is set at the beginning when the company first starts up in its legal documentation. And they were issued for one pound cash for each of these ordinary shares, which means the owners, the shareholders, must have given the business 100 pounds worth of cash. Actually that's a really important point before I move on that you need to have an understanding on. A limited company in the eyes of the law is looked on as a totally different independent person. And therefore the owners, and the company are seen as to be separate. So in this instance, where the owners invest by buying shares and paying one pound each for them, the cash that is received it received by the company. Now, even though the owners, the shareholders, it's their cash because they own the company. It's a concept you need to get your head around. If you're forming a limited company for your business plan, then you need to ensure that you are fully aware that the business has a complete separate legal identity to you the owner. The second thing that happened is Genius Ltd obtained a 50 pound bank loan. But an annual interest rate of 10%. The loan is repayable at the end of five years. So they'll have to pay interest each year, but they don't have to pay the loan back for another five years. What else happened? Well, the third thing that happened is they paid annual rent for the year. Unrealistic, but it's just a number. They paid five pound worth of annual rent. They then went on to buy some equipment for 50 pounds in cash. This equipment they're expected to use for five years. And they're going to depreciate it evenly, straight line, over that five year period. In other words, they'll simply take the cost and divide it by five, and that would be the annual depreciation charge for the next five years. They're going to buy some inventory, some stock, on credit and that means that they're going to buy it, but not pay for it straight away. And this inventory that they're going to buy, to purchase, is worth 50 pounds. At the end of the year, they still owe 10 pounds of that 50 pounds. So when they paid or they bought this inventory on credit for 50. They've only paid a certain amount so outstanding is still 10 pounds. They made some sales on account on credit terms if you wish, and these sales amounted to 80 pounds. 80% of the inventory bought is what was sold. So just to recap on that, they made some sales on credit for 80 pounds and that was 80% of the items that they had previously bought. By the end of the year, the customers still owed 20 pounds of the 80. They also paid some various expenses totalling five pounds all paid in cash. Genius also paid some bank loan interest amounting to five pounds. And they calculated that their tax bill at the end of the year would be three pounds. But that hasn't been paid. And that's obvious if you think about it especially, if you can recall the matching principle. So, even though the tax bill is calculated based upon this year's profits, it won't be paid until next year. That's because we don't know how much profit we've made until we get to the end of the year. And therefore, enables us to calculate our tax bill. No salary was taken at all, but there were some dividends that were paid out. There was 10 pounds worth of cash dividends that were paid on the last day of the year. So there are a few requirements here that I'd like you to go through or take you through. First of all, what would the cash flow be for the year? And also, what would the income statement for the year look like? We'll also then go on and of some other information that we can get from this and maybe get a bit of a better understanding if you wish. When we're looking at Genius Ltd and we're looking at cash flows, income statements and we'll come back to it in a moment, the balance sheet. [MUSIC]
