The following topics and concepts were covered in this session through the pizza food truck

activity:
● The basics of accounting
● The impact of business decisions on the three financial statements
● The link between the three financial statements

The exercise revolved around a pizza food truck business that is yet to start its operations. In the
start-up phase, the following financial transactions had taken place for the month of December.

These transactions impacted the financial statements, i.e., the balance sheet and cash flow
statement. The following points are key while accounting for these transactions:

● The cash injected by the food truck owner into the business is called the ‘share capital’.
● The raw materials purchased to manufacture pizza will be recorded as ‘inventory’.
● The ‘cash balance’ on the assets side of the balance sheet is the ‘cash at the end’ value
from the cash flow statement.
● The ‘total of assets’ is always equal to the ‘total of liabilities and equity’.

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For the month of January, the following financial transactions had taken place for the pizza food
truck business.

These transactions impacted the three financial statements. The following points are key while
accounting for these transactions:
● The cash balance at the end of the previous month becomes the cash balance at the
beginning of the next month.
● The raw material and utility cost is an expense for the production of pizza.
● The inventory of raw materials at the end can be calculated using the following formula.

● By the matching principle concept, Cost of goods sold = Quantity sold x Production cost
per unit. Matching principle states that in the income statement, costs should be recognised
at the same time as the corresponding sales revenue, as the produced goods can be either
stored or sold.
● The truck rental cost will be a fixed expense for the food truck business.
● Using the ‘realisation of sales’ principle, Sales revenue = Quantity sold x Selling price per
pizza. This principle states that the sales should be recognised as the sales revenue when
the goods/services become the property of the company’s customer, irrespective of the
receipt of cash for them.
● Cash at the end of the period can be calculated using the following formula.

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 ● The income statement accounts for the sales, cost of goods sold and other expenses for the
current period to arrive at the profit.
● The bottom line of the income statement is the profit for the month. It belongs to the
company’s shareholders and is, hence, added to the share capital in the balance sheet.

The ‘break-even’ point is a financial tool that helps in determining the number of units to be sold in
order to cover all expenses. It represents the minimum number of goods that need to be sold in
order to generate profits.

There are two types of costs:

The formula to calculate the break-even point and variable margin is given below.

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For the month of February, the following financial transactions had taken place for the pizza food
truck business.

These transactions impacted the three financial statements. The following points are key while
accounting for these transactions:

● ‘Sales on credit’ translate into ‘accounts receivable’ on the asset side of the balance sheet.
● The accumulated undistributed profits or losses of the company for the previous period are
recorded as the ‘retained earnings’ for the current period.
● In the balance sheet, assets should not be overvalued, and liabilities should not be
undervalued. This is known as the prudence principle.
● Inventory should be valued at the lowest of cost or purchasing price and market value.

If a company has negative or zero cash at the end of month but positive profit, there is a need to
analyse the reasons why the cash is stuck. If the cash is stuck in funding the operating working
capital, then there is a further need to analyse the following:

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For the month of March, the following financial transactions had taken place for the pizza food truck
business.

These transactions impacted the three financial statements. The following points are key while
accounting for these transactions:

● Fixed assets provide future economic benefits to the company.

● Outstanding payments create future liability for the business.
● Depreciation represents the spread of the purchasing price of an equipment throughout its
forecasted useful life span. It is expensed in the income statement for the current period. The
following are the key points about depreciation.

● Insurance on fixed assets is a recurring cost that the company needs to pay every month.
This value would be expensed in the income statement, irrespective of the cash or credit
purchase of the truck.
● Owner’s equity can be calculated using the following formula.

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For the month of April, the following financial transactions had taken place for the pizza food truck
business.

These transactions impacted the three financial statements. The following points are key while
accounting for these transactions:
● Increase in the credit sales increases the accounts receivable for the business. This impacts
the cash flow of a business.
● Purchase of fixed assets leads to cash outflow from the business.
● If the cash inflow from operating activities is less than the cash outflow from investing
activities, the cash at the end may turn negative or less than the cash at the beginning of the
period.
Analysing the three financial statements reveals the financial position of the company, which helps
in decision-making.

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