Category Archives: Financial Statements

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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Lesson 3: Financial Statements – Part 2

A thick layer of clouds covers the night sky and darkness enshrouds the landscape. All starlight is blotted out; even the moon is unable to penetrate the cloud barrier. The only thing you see is a faint green glow emanating from a source that resembles the shape of Celia. You wipe your eyes groggily and continue trudging behind the moving green glow.

“So, where are we going?” you grumble, loudly clearing your throat.

“Farwood village,” the glow replies. “I’ve got a friend there who can help you on your journey.”

“Oh,” you grunt and continue walking in silence.

An hour passes. Suddenly, the green glow disappears.

“Uh, a little light would be-” you start but Celia shushes you.

“Get down!” she whispers. Immediately, a powerful force knocks you off your feet. You are thrown several yards and hit the ground with a thud. You roll on your side, wincing in pain. Then you hear a terrifying screech that causes the ground to tremble below you. Reflexively, you cover your ears. The intensity of the sound is so powerful that it temporarily paralyzes you. It sounds as if thunder is crashing all around you, and the ground feels like it is going to collapse under you. You wonder if this could be the end of your journey.

Suddenly, the noise vanishes. You lay on the ground in silence. Slowly, you begin to break out of your paralysis. You glance around for the source of the terrible sound, but it’s still pitch black. Then you notice a familiar green glow moving toward you.

“It’s gone. Are you alright?” Celia asks.

“Fine.” you reply quickly. Grimacing, you slowly get on your feet. “What was that?”

“That was your first encounter with an elder dragon.” Celia responds. “It’s an ancient and unbelievably powerful creature. It flies only under the darkest nights making it virtually invisible. It’s nearly impossible to sense until it already has you in its clutches. There is no rival to it on earth in terms of agility and strength.”

“It must have hit me with its tail or something,” you say rubbing your bruised ribs.

Celia chuckles. “That wasn’t its tail. You got hit with the force of its wing beat. It probably wasn’t after us anyway. Otherwise, we’d be dead already.” Your eyes widen, and for the first time, you closely examine your surroundings. It’s still very dark, but you can see some of the damage. Trees lay scattered around, splintered and snapped like twigs. It looks like a tornado passed through the area. “What kind of monster could do this?” you think to yourself.

“Alright, we have to keep moving if we’re going to make it to the next town by morning,” Celia asserts. “I also believe it’s time for your next lesson.”

You knew that was coming sooner or later. You and Celia make your way around the fallen trees and continue along the path.

“So we are picking up from our last discussion about financial statements. The next statement is the income statement. An income statement is a report of a company’s financial performance for a period of time. This is like a summary of your performance on the battlefield over a certain length of time. There are two key sections of the income statement: revenues and expenses. Revenues are increases in the company’s assets from doing business. For example, a weaponsmith is in the business of selling weapons. The weaponsmith earns revenue when he makes money from selling weapons.”

You mumble something about having a headache, and Celia continues.

“As a warrior, your business is doing battle. You earn revenue when you gain treasure and experience as a result of battle. For example, let’s say you defeat a goblin and find 50 gold coins in its pocket. By looting the gold coins from the goblin, you’ve just increased your assets. This increase in assets is called revenue. Remember, the gold coins themselves are assets. Receiving the gold is represented by the revenue.”

Your ears perk up when Celia mentions the word goblin. “Isn’t it enough to say I got more assets when I get the gold? Why should I care about revenue?”

“Good question. When you get more assets such as weapons or treasure, it’s important to know where those assets came from. Did you buy them? Did you find them? Did you slay an insanely powerful creature to get them? Revenue tells you what you’ve received as a result of doing battle. Thus, it will help you determine your performance on the battlefield.”

“So, if I sell the goblin’s head I got, I don’t get any revenue?” you ask with furrowed brows.

“No, but that is a good point,” replies Celia. “Earning the goblin head from a tough battle tells me something about your performance on the battlefield. However, selling the goblin head doesn’t tell me anything about your battle performance.”

“I suppose that’s true,” you remark. You and Celia walk in silence for a few minutes. You notice the sun beginning to peek over the distant hills, and you hear the first chirps from the early-rising birds.

Celia continues as if there had never been a break in the conversation. “Expenses are decreases in the company’s assets from doing business. For example, when the weaponsmith sells weapons from his inventory, his assets decrease. Again, the weapons themselves are assets. The decrease in assets from doing business causes, or incurs, an expense.

Expense is the cost of doing business. When you battle a monster, the damage you take is an expense. The damages to your sword and shield are also expenses. These are the costs of doing battle. You are willing to take this damage in order to gain treasure and experience and thus, earn revenue.”

“I think I understand,” you say, “but it’s still a little fuzzy.”

“It’s okay,” Celia reassures you. “These concepts can be confusing sometimes. Just think of revenue as the benefit of doing business and expense as the cost of doing business. We’re almost done with this lesson. This last piece might go over your head, but I think it’s worth mentioning. Don’t worry if it doesn’t make sense now, because we’ll talk about it in more detail in the future.”

“Okay. I’m ready,” you reply, focusing your mental strength.

“It is important to know if your performance in battle is profitable. If all your revenues combined are greater than all your expenses combined, you are performing profitably. For example, if you are taking little damage from your foes before obliterating them and then reaping large amounts of treasure and experience, you’re likely profitable. However, if all your expenses are greater than your revenues, you are not performing profitably. If you are taking high damage and receiving little or no benefits from the battle, you are probably not profitable.

Revenues and expenses are related to the owner’s equity section of the balance sheet. Remember, owner’s equity is like your personal value. When you’re performing profitably, revenue is greater than expenses. Since the benefits of doing battle (treasure and experience) are greater than the costs of doing battle (damage), you’re increasing your value. If you’re not performing profitably, you’re decreasing your value.”

“Wow,” you say with a dazed look in your eyes.

“I know that is information overload.” Celia empathizes with you. “But it is important to know how to measure your performance on the battlefield. Should you focus on stronger monsters to gain more experience? Should you target monsters that drop more valuable items? Should you focus mainly on avoiding damage during battle? These are the types of questions that the income statement will help you answer.”

You pass through a small forest and come to a grassy hillside.

“The village is just over this hill,” Celia says. “Then you’ll finally be able to make use of that notebook….” Her voice trails off. You look up and see large clouds of dark smoke rising from beyond the hill.

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