Lesson 2: Financial Statements – Part 1

The ancient forest gives you an eerie feeling despite its magnificence. The wind whistles through the leaves of the enormous trees that tower over you. Sunlight glistens through the trees giving the forest floor a speckled appearance. There is a slight chill, and a faint mist lingers in the air. You climb over a large, gnarled tree root and land on a pile of leaves. The leaves crack and crumple under the weight of the impact. Moments later, an arrow whizzes by within inches of your face.

You immediately drop to the ground and grip your sword tightly. You look up and see a goblin arrow lodged in the gnarled tree root. Your heart is pounding, adrenaline is pumping through your veins, and your instincts take over. You whip out your sword and shield, quickly scan the area, then charge in the direction of the archer. Arrows begin zipping by as you deflect them with your shield. There are at least three goblins. You close in on the first goblin and use your shield to knock the creature to the ground. You whip around and catch the second goblin in its torso with the edge of your blade. The third goblin lunges toward you with a short sword. You effortlessly block the attack and drive your sword into the creature. Out of the corner of your eye, you spot a fourth goblin covertly raising its bow. You move toward the creature as it fires an arrow at you, but your shield deflects it. The goblin turns to run, but you get there before it has a chance. With a flash of your sword, the creature crumples to the ground.

Several hours later, you return to Celia carrying the spoils of your venture.

“How did it go?” Celia asks apprehensively, eyeing the severed goblin head in your hand. You give her a big grin and hold up your trophy. Celia looks away.

“I can already feel the present value of my strength approaching its future value!” you claim.

“Well that’s wonderful! I hope you enjoyed it, because from now on, you’ll be recording all the details of your battles in this journal.” She tosses you a little green book.

“Seriously?” you complain, catching the book. It would be green.

“Yes, this will enable you to track your performance, so you can make smarter decisions and reach Master level faster.” Celia tosses you a pencil. “Alright, warrior. Lesson 2. Financial Statements. In accounting, companies produce financial statements to help investors and lenders decide where to put their money. A financial statement is simply a report that states information about a company in terms of dollars or another currency. Imagine having an organized and up-to-date record of your inventory, skills, and other useful data…” As Celia is talking, you’re flipping through the blank green pages in the journal, wondering how in the world you are going to fill them up. Celia crosses her arms. “Hey! Are you listening to anything I’m saying?”

You reply with a yawn, “Yea, yea, I can keep track of my entire inventory. So what?”

“So these records will tell you how you’re performing overall. How else will you or I know if you’re training efficiently and improving? You can only remember so much.”

“I guess you’re right”, you say rubbing your chin. “I do want to get stronger as fast as possible.”

“Good,” Celia replies. “Now there are three main financial statements: balance sheet, income statement, and cash flow statement. Let’s start with the first one. The balance sheet shows the current financial condition of the company at a specific point in time. That’s why it’s also known as the statement of financial position. Think of it as a detailed inventory system that shows everything that you own, anything you’ve borrowed, all your skills, and your overall worth. Pretty neat, huh?”

“Yea, that is kind of cool,” you comment.

“There are three main sections of the balance sheet: assets, liabilities, and owner’s equity. Assets are like your resources. They include anything that is going to have a positive future effect for you. So, for example, your weapons, items, and skills are all assets to you, because they have some future benefit to you. Liabilities are what you owe – all your obligations. For example, let’s say you borrow a wooden bow from one of your warrior friends. Your friend might make you sign a contract agreeing to return his bow later. The contract represents your obligation, or liability. Liabilities have a negative future effect on you (i.e. returning the bow).”

“Hold on,” you interject. “I’m confused. I thought you said weapons were assets. So why is my bow a liability?”

“Great question,” Celia replies. “There is a difference between the bow you receive and your obligation to return the bow. The bow itself is an asset. Your obligation to return that bow, represented by the contract, is a liability. Liabilities have a negative future effect because you have to give up your assets in the future.”

“Okay, I think I understand.”

“It will become clearer over time. Let’s continue to the third and final section of the balance sheet. Owner’s Equity is like your personal value. It’s what is left after you remove everything that you owe to others. Technically speaking, it’s all your assets minus all your liabilities. Successful questing can lead to increases in personal value, or owner’s equity, when you earn experience and gain assets. You’ll see how in the next lesson. For now, you should rest up. We’ve got a journey ahead of us tomorrow.”

*                          *                          *                          *

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