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Part I
Although he owned his own business, Jeff Birch was a financial novice. His passion was
dogs, and he had finally made the move to start a specialty dog services business in an upscale
section of a large mid-Atlantic city. In its first two years, Dog Concierges, LLC, had grown to
about $650,000 in sales. Historically, he had left all financial concerns in the hands of his sister,
Jennifer Birch, an aspiring CPA. But she had recently graduated from college and was leaving in
a month to start her career in Atlanta. Jeff had asked her to give him a crash course in
Accounting 101, so he had some handle on the accounting process and the resultant financial
statements—well enough, at least, to converse in an informed manner with his sister’s
replacement. He had not minded totally leaving the books to her, but he now felt the need to be
better informed, since her replacement would not be his “trusted little sis.”
Jennifer had thought long and hard about how to cram the equivalent of an entire
semester of Accounting 101 into a manageable hour-long tutorial that Jeff conceivably could
internalize. She had gravitated to an approach reliant on diagrams, with a minimum of traditional
technical jargon. She crafted the diagram depicted in Exhibit 1, explaining to Jeff that it had the
capacity to illustrate all his financial transactions. The key to keeping his financial records
correct and up to date, she said, was to ask three questions for every business event, all the while
keeping the equality of the starting equation true:
After presenting the diagram and its underlying explanation to Jeff, Jennifer decided she
needed to give him a bit of homework. She crafted a number of hypothetical business events that
she knew were representative of some the business was likely to incur; those events are listed
This case was prepared by Mark E. Haskins, Professor of Business Administration. It was written as a basis for
discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2009
by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies,
send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a
retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of the Darden School Foundation.
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below. She then instructed Jeff to explain to her, for each of those independent business events,
which part of the diagram was affected, in what direction, and by what dollar amount.
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Jeff felt a bit uncomfortable having to perform for his sister, but he knew it was for his
own good. So, he began.
Part II
Jeff’s sister had taught him well. Not only did he accomplish the task she had set up for
him, but he also was able to craft a current balance sheet and income statement by using the
actual account information Jennifer had recently codified for the current year-end (Exhibits 2
and 3). He now wanted to check his understanding of how to construct a statement of cash flows.
He believed that if he understood “how it was constructed,” his understanding of “what it
depicts” would be cemented.
Using a bit of basic algebra, Jennifer had transformed the relationships depicted in
Exhibit 1 to reflect the underlying fundamental construction of a statement of cash flows (see
Exhibit 4). In essence, the statement was to depict the change in cash by reporting the changes in
all the other balance sheet accounts. Jeff figured he could use the Exhibit 4 information to both
construct and interpret a statement of cash flows. He considered it imperative that he be able to
explain why he crafted the statement of cash flows the way he did, rather than relying on a
mechanical execution of the Exhibit 4 aid. So, using the net income and depreciation figures
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from the income statement in Exhibit 3 and the balance sheet changes he noted in the margin in
Exhibit 2, he set out to construct a statement of cash flows for this year for Dog Concierges,
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LLC. Jennifer did remind him that the “building” and the “retained earnings” line items required
a bit of special handling. That didn’t faze Jeff in the least.
In fact, he felt so confident that he could craft a correct statement of cash flows for this
year that he personally bet his sister $100. As he began, he wondered if the bet was a financial
event he would have to reflect in the statement. What irony if he lost the bet because he didn’t
correctly report the bet in the statement of cash flows!
Part III
Jeff was feeling pretty confident. He decided to also use the Dog Concierges, LLC,
statement of cash flows for the previous year (see Exhibit 5) and the balance sheet as of the end
of the previous year (see Exhibit 2), to re-create the balance sheet for the year ended two years
earlier. He thought he’d be finished in time to make his 4:00 p.m. tee time.
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Exhibit 1
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Note:
A/R = accounts receivable
Ppd/A = prepaid assets
A/P = accounts payable
W/P = wages payable
I/P = interest payable
T/P = taxes payable
Source: Adapted from a similar exhibit presented in Mark Haskins, The Secret Language of Financial Reports (New
York: McGraw-Hill, 2008).
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Exhibit 2
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Exhibit 3
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Income Statement
(for this year ended December 31, in thousands)
Sales $650
Cost of goods sold 450
Gross profit 200
Depreciation expense (45)
Miscellaneous expense (130)
Net income $25
Exhibit 4
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Panel A
3. Cash + A/R + Inventory + Ppd/A + Vehicles + Buildings + Land + Investments = A/P + W/P
+ Short-term loans + I/P + Bonds Payable + Long-term loan + Contributed Capital + Net Income
– Dividends
4. Cash = Net Income – A/R – Inventory – Ppd/A – Vehicles – Buildings – Land – Investments +
A/P + W/P + Short-term loans + I/P + Bonds Payable + Long-term loans + Contributed Capital –
Dividends
Exhibit 4 (continued)
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Panel B:
Source: Adapted from a similar exhibit presented in Mark Haskins, The Secret Language of Financial Reports (New
York: McGraw-Hill, 2008).
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Exhibit 5
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