28 Sales revenue and accounts receivable
Exploring One Link at a Time
Please refer to Exhibit 4.1 at the start of the chapter, which
shows the connection between sales revenue in the income
statement and the accounts receivable asset account in the bal-
ance sheet. This exhibit is taken from Exhibit 3.1 in Chapter 3 .
Exhibit 3.1 presents the big picture; it ties together all the con-
nections between the income statement and the balance sheet.
This chapter is the ﬁ rst of many that focus on just one connec-
tion at a time. Only one line of connection is highlighted in
Exhibit 4.1 — the one between sales revenue in the income state-
ment and accounts receivable in the balance sheet.
Friendly Reminder: In Exhibit 4.1 (and all those exhibits
to follow in the coming chapters) the income statement and
balance sheet are stripped of subtotals. For example, the income
statement is a single - step statement, meaning that no lines are
shown for gross margin and other intermediate measures of
proﬁ t. Likewise, in the balance sheet no subtotals are shown
for current assets and current liabilities and for the amount of
property, plant, and equipment less accumulated depreciation.
Excluding subtotals gives us lean and mean ﬁ nancial statements
to work with.
Another Friendly Reminder: Exhibit 4.1 does not include the
company ’ s statement of cash ﬂ ows for the year. The connections
between changes in the balance sheet accounts and the cash ﬂ ows
statement are explained in Chapters 13 and 14 . The cash
ﬂ ows statement would be a distraction at this point.
The central idea in this and following chapters is that the
proﬁ t - making activities reported in the income statement drive, or
determine, an asset or a liability. Assets and liabilities are reported
in the balance sheet. For example, the company ’ s sales revenue for
the year just ended was $ 52 million. Of this total sales revenue,
$ 5 million is in the accounts receivable asset account at the end of
the year. The $ 5 million is that part of annual sales that had not
yet been collected at the end of the year.
In the following chapters we explore each linkage between
an income statement account and its connecting account in the
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