Practical ExampleModule 3 of 6
Northside Bikes
Northside Bikes is a small bike shop. Here are its statements for the year.
Income statement
| For the year | Amount |
|---|---|
| Revenue | $420,000 |
| Cost of goods sold | $252,000 |
| Gross profit | $168,000 |
| Wages | $84,000 |
| Rent | $36,000 |
| Marketing | $12,000 |
| Other operating expenses | $9,000 |
| Operating income | $27,000 |
| Interest | $3,000 |
| Income tax | $3,600 |
| Net income | $20,400 |
Balance sheet at year end
| Assets | Amount | Liabilities and equity | Amount |
|---|---|---|---|
| Cash | $18,000 | Accounts payable | $22,000 |
| Accounts receivable | $6,000 | Loan payments due this year | $8,000 |
| Inventory | $64,000 | Long-term loan | $32,000 |
| Equipment | $42,000 | Owner's equity | $68,000 |
| Total assets | $130,000 | Total liabilities and equity | $130,000 |
Cash flow summary
| Activity | Amount |
|---|---|
| Operating activities (profit, adjusted for extra inventory and timing) | +$14,400 |
| Investing activities (a new repair stand and tools) | −$4,000 |
| Financing activities (loan repayment) | −$8,000 |
| Change in cash for the year | +$2,400 |
What the numbers say
- Gross margin: $168,000 ÷ $420,000 = 40%.
- Net margin: $20,400 ÷ $420,000 = 4.9%.
- Current ratio: $88,000 ÷ $30,000 = 2.9. Current assets (cash, receivables and inventory) are almost three times current liabilities.
The shop earned $20,400 of profit, but its cash grew by only $2,400. The difference went into extra inventory, new tools and loan repayments. That's normal for a growing shop, and it's why owners watch cash as closely as profit.