[MUSIC] Now it's time for a recap to conclude the second week of the course. Remember that accounting is the process that records the business transactions that take place, in this case in the campus bookstore in our example. Classifies them under different accounts and produces summary reports for the shareholders of the company and other external users. So far, we have introduced two financial statements, the balance sheet and the income statement. The balance sheet is the first and most important financial statement, everything is there. Any single transaction that takes place in the business is going to effect the balance sheet. Remember, each transaction effects at least two accounts. This is the way that the basic accounting equality always calls. So assets equal owner's equity plus liabilities. So the balance sheet is a summary, where you have all the sources of capital, liabilities was these an external source of capital. And owners' equity, when this capital contributed by shareholders or generated by the firm with the profit and loss account. And on the other hand, you have the users of capital. In this case we call them assets. And you classify the assets under current assets or noncurrent assets. Current assets are cash, or they're going to become cash in the short run, like accounts receivable, that w'd expect to collect soon. Or inventories that we'd expect to sell and then collect. And noncurrent assets that we have there for the long term. And remember that today we have introduced depreciation. So these noncurrent assets will decrease in value over time, because they have a limited useful life. But it's important to have in mind always, is that we're talking about the same amount of money. On the right hand side we have ownership and liabilities. Those have the sources of capital, so the prices lies from the point of view of where is the money coming from? On the left hand side, the same prices lies from the point of view of, where is the money now? So the different assets that you have in the business. So at the end of the day, we are talking about the same amount of money from two points of view. Now, we said that the balance sheet is a picture at the point in time where you just see the ending balance of each one of the accounts. So it has it's limitations. And I asked you, which of these accounts would you like to know more about? And today we started with the P and L account. The profit and loss account gives us information about the operations of the business. How are we incrementing the net worth of the shareholders with operations? And so, we want to know more about it. So instead of just having a picture at a point in time, we would like to have the full movie of the year. The income statement is the second financial statement that provides this information. So it takes all the revenues and expenses from these P and L accounts and organizes them in a sort of analytical way. And so, we start with revenues minus the cost of what's sold. We get the gross margin minus SG&A minus depreciation, we get the operating profit and then below, financial expenses and tax expenses to get the net income. And so, this net income, we can compare it to the sales, we can compare it to the investment in the company, in order to extract information about the profitability of the business. And one last idea. We said, well, take into consideration that profit is not the same as the change in cash. Why? Because there are many revenues that have not been collected yet. Or maybe they are prepayments that you have not recognized as an expense, as in prepaid rents. Or you have expenses that you have recognized as an expense but you have not paid yet. So there is a mismatch in time between profits and cash. And so the next week, we're going to talk about another financial statement that will take care of cash that will analyze the generation and consumption of cash in the business. So I'm looking forward to seeing you next week in order to discuss the cash flow statements. [MUSIC]
