Tag Archives: income statement

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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