Finance

At the very beginning of this journey we mentioned that there are three financial statements – balance sheet, income statement, and cash flow statement. We have covered the first two, and now let’s look at their relationships between we go into the third statement.

A balance sheet has two sides. On the left side, it shows the assets; on the right side, it shows the liabilities and stockholder’s equity. An income statement functions like a funnel where at the very top we have the revenue of the company, and by deducting all costs, expenses, and taxes from the revenue, we will arrive at the net profit of the company.

For our fictional company, it has a 5.2 million dollars net profit for its first year of operations. The shareholders have decided to distribute 1 million dollars as dividends, and keep the other 4.2 million dollars as retained earnings in the company. If our company makes another 5.8 million dollars of net profit in the next year and have decided to keep every penny in the company, the company will have a total of 10 million dollars of retained earnings by the end of the second year. Here we can see that balance sheet shows us the current status of the company’s financial situation, while income statement shows the process of a period of time.

Cash Flow Statement

Cash flow statement might look the most daunting amongst the three financial statements. It is long, and includes a primary table and appendix. Both parts have a lot of information. However, even though cash flow statements look the most complex, it is actually the easiest financial report. First, let’s look at what is cash flow.

Definition of Cash Flow

Cash flow is such an simple concept that everyone can understand easily. Just like what the name tells us, Cash Flow is simply cash flowing in and out of the company. Cash inflow means money I receive, and cash outflow means money I spend. 

Therefore, cash flow statements tell us the amount of money I receive and spend. That’s it.

For example, sometimes we hears people say they are doing some bookkeeping for themselves. They rarely would make a balance sheet or an income statement. More often than not, bookkeeping is just some sort of financial journaling, detailing every single transaction the person has made. To write down these journal entries, one does not need any accounting skills. All that is needed is simple addition and subtraction.

And that is all you need to do cash flow statements well.

How to Cash Flow

Different from doing a personal financial journal, we categorize business activities into:

1. operating activities
2. investing activities
3. financing activities

Even though a company might have all kinds of business activities, sometimes well over tens of thousands in a year, from an accountant’s perspective, companies only have these three kinds of business activities. So all cash inflows and outflows will be divided in these three categories.

In fact, I can also do my own bookkeeping based on this categorization. 

For example, if I get paid today from my company, what kind of cash flow is this?

Put it in another way: if my household is the company, me going out to work every day is the company’s main business operations. In addition, since I’m receiving money from my company, this is a cash inflow from my operating activity.

After I got paid, I bought some groceries on my way home. From the household’s perspective, the action of buying groceries should also be my operating activity, because it happens every day. This is an operating cash outflow. Other than groceries, we can easily come up with other similar operating cash outflows such as the wage I pay to the hourly cleaners, the personal income tax, etc. 

Once I have been working a while, I have saved some money and am ready to buy a house and a car. Such purchases don’t happen every day, and from the household’s perspective, both are investing cash outflow since we are paying somebody money. If I sold my house or car and received money, it should be investing cash inflow. 

What if I got a loan when I purchase the house or car? Getting a loan is also often called getting “financing”, and it’s easy to conclude that this is financing cash inflow (because I’m receiving money from the bank). On the other hand, when the payment terms kick in for me to pay back interests and principal, the expenses related to the loan are financing cash outflows.

So even as an individual who wants to bookkeep his own expenses, I can still separate the records into the three categories. This classification will not add, but reduce complexity.

Cash Flow Statement for Company

For a company, what cash inflow and outflow are there?

Operating Cash Inflow

Similar to households, a company’s most common operating cash inflow is sales. When we sell something, we will generally receive cash, sooner or later. This is an important operating cash inflow.

One interesting item that might appear on the cash flow statement is a cash inflow tax item. How can tax become a cash inflow?

One possible explanation is that certain companies might receive tax returns for operating in certain industries that are encouraged by the government. An even more common explanation that applies to almost all companies is that since companies will “charge” value-added tax on top of the product price and withhold it on behalf of the tax bureau, it will show up as an operating cash inflow.

Operating Cash Outflow

Next, I might need to buy inventories such as raw materials, pay salaries to my employees, and pay taxes to the tax bureau, etc. All of these business activities will incur operating cash outflow.

Investing Cash Inflow

What will lead to the investing cash inflow? There are two possibilities. 

One possibility is when I sold my investment. For example, the sales of buildings, equipments, machines, vehicles (investment in the company), or the sales of stocks or bonds of the companies I invest (investment outside the company), all of which bring in cash inflows.

Another possibility is when my investments pay dividends. For example, a subsidiary may pay me dividends, which is a return on my investment. This return also brings me cash inflow.

Investing Cash Outflow

There are only two kinds of investment for business: investing in the company and investing outside the company. The former will become tangible and intangible assets of the company, while the latter will become stocks, bonds, or other finance products in other companies. No matter the investment is inside or outside of the company, money spent on investment is investing cash outflows.

Financing Cash Inflow

For companies, there are two way to financing money: issuing debt or issuing stock. Whichever option the company selects, it will bring cash inflow. 

Financing Cash Outflow

If a company issues debt, it will need to pay interests upon the debt’s maturity. If a company issues stock, it may need to distribute dividends to shareholders. Both debt payments and dividends are financing cash outflows. 

These are easy to understand. But there is actually another activity that might incur financing cash inflow – leasing. 

Not all leasing contracts are the same. From an accounting perspective, we need to differentiate leases by the size of payments and the length of contracts. Short-term and small leases are categorized into operating leases, and long-term and big leases are categorized into capital leases. Even though both are leases, from an accounting perspective, capital leases are actually considered purchases of assets by way of debt, and each term of lease payment will be treated as interest payment, or financing cash outflow. Capital leases actually show up on the balance sheet under liabilities as “long-term payable”.

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Now that we’ve gone over the basics of a cash flow statement of a company, we will dig deeper into what the statement shows us in the next few episodes.

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Now that our company has been established, raw materials and fixed assets procured, first sales made, and our company also invested in R&D and procured raw materials for the next year, let’s look at how taxes and profit distribution affect the company’s financial statements.

Because we borrowed money from the bank, we now owe the bank 1.3 million dollars of interest expenses in the first year. At the end of the first year, the money is due and we will pay out this amount from our bank account. As a result of this, our cash position is reduced by 1.3 million dollars on the balance sheet, and we also need to record the same amount under financial expenses on the income statement. 

Next, our company accrued 1 million dollars of income tax from our first year’s operations. 

Once again, we will need to pay out 1 million dollars from the bank account, so our cash is reduced by this amount. On the income statement, there is a place called income tax and that’s where we put the 1 million dollars in.

Now that we have all the costs and expenses recorded, what is our net profit from this year’s operations?

We can get the number by subtracting all the costs and expenses from our revenue, and we come up with 5.2 million dollars – our first year’s net proft.

As a shareholder of the company, we have the option to withdraw this money from the company. Let’s assume that instead, we’ve decided to withdraw only 1 million dollars from the company and keep 4.2 million dollars in the company. The 1 million is called cash dividend. The 4.2 million dollars, if you recall, is actually treated as reinvestment into the company by the shareholders, called Retained Earnings.

The total of 4.2 million dollars actually belong to the shareholders, but instead, they choose to put the money back into the company, making this money retained earnings.

Our cash position further decreases by 1 million dollars after we decide to distribute this amount as cash dividends to shareholders. We then put 4.2 million dollars in retained earnings under Shareholder’s Equity. This economic activity does NOT affect income statement, since it stops once the net profit is arrived at. 

So far all economic activities occurred to our fictional company are reflected on our statements one by one. That is to say the statements presented before us are the balance sheet and income statement of the Company. Let’s have a look at the statements.

Income Statement

From the income statement we can see that our company made 43 million dollars in the first year, and spent 31 million dollars on costs of those goods sold. The Gross Profit of making the sales is 12 million dollars. 

Next, our company incurred 2.5 million dollars of operating expenses, 2 million dollars of administrative expenses, and 1.3 million dollars of financial expenses in the form of interests. We didn’t suffer any impairment loss of asset, and made no investment income. The Operating Profit of the company is 6.2 million dollars. Without non-operating incomes and expenses and subsidy income, the Total Profit is also 6.2 million dollars.

With the deduction of one million dollar income taxes, the Net Profit of 5.2 million dollars.

In summary, our company made 43 million dollars in revenue, which resulted in 5.2 million dollars in net profit in the first year. That is more than 10% net profit ratio! Considering that this is the first year of the company’s operations since establishment, this number is not only good, but great!

Balance Sheet

On the balance sheet we can see that the company has 99.2 million dollars worth of assets, contributed by the bank, shareholders, and supplier. Let’s break it down a little bit and see how this happened.

First, the shareholder invested 32 million dollars and borrowed 51 million dollars from the bank. In the course of operation, we owed the suppliers and various parties 12 million dollars. At last there is another 4.2 million dollars left as an additional investment of the shareholder to the company. This is where the 99.2 million dollars worth of funds came from.

So where has all the money gone?

We can see that theres still 21.2 million dollars of cash in the bank account as cash. We also have 5 million dollars of inventory, 13 million dollars of accounts receivable, and 1.5 million dollars of advanced payments. All of these are current assets, i.e. assets that can be turned into cash easily.

Further down the line, 57 million dollars are turned into the fixed assets and 1.5 million dollars into intangible assets, i.e. land usage rights. 

The balance sheet describes a company’s financial condition – what our initially invested money has become. The reason we care about this is that before we make money from our investments, we want to know whether our principal is safe.

Let’s analyze this a little bit before we jump to the conclusion.

Is My Investment Safe?

Our concern is that the value of the assets will be lost somehow. Which project do you think has the biggest risk? 

The first thing we see is accounts receivable. There are 13 million dollars of accounts receivable for the company. If there is any reason that part of the 13 million dollars are uncollectible, this asset will need to be reduced. For example, if 2 out of the 13 million dollars are not collectible, we will have to change this asset item into 11 million dollars. If we do not consider the impact on the tax, the net profit of 5.2 million dollars would now shrink to 3.2 million dollars. If there are more than 2 million, say 10 million dollars of the 13 million become uncollectible, this problem would be very serious. The net profit would no longer be 5.2 million dollars; it would be a negative number!

We can see that the guaranteed value of our assets is super important for obtaining reliable profits. Of course, besides the existing risk of uncollectible receivables, our inventory value might decrease; our fixed assets will wear or tear, accruing depreciations. Fixed assets may also encounter sudden decrease in value due to technology advancement, i.e. when there are more advanced technologies in the market, the current value of fixed assets (equipment) will decrease suddenly. Similar things could happen to intangible assets as well. 

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} #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody form { margin: 0; width: 100%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-formContent, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow { margin: 0 0 20px 0; width: 100%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow { float: left; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-formContent.horozintalForm { margin: 0; padding: 0 0 20px 0; width: 100%; height: auto; float: left; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow { margin: 0 0 10px 0; width: 100%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow.ml-last-item { margin: 0; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow.ml-formfieldHorizintal { margin: 0; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input { background-color: #ffffff !important; color: #333333 !important; border-color: #cccccc; border-radius: 4px !important; border-style: solid !important; border-width: 1px !important; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif; font-size: 14px !important; height: auto; line-height: 21px !important; margin-bottom: 0; margin-top: 0; margin-left: 0; margin-right: 0; padding: 10px 10px !important; width: 100% !important; box-sizing: border-box !important; max-width: 100% !important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input::-webkit-input-placeholder, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow input::-webkit-input-placeholder { color: #333333; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input::-moz-placeholder, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow input::-moz-placeholder { color: #333333; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input:-ms-input-placeholder, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow input:-ms-input-placeholder { color: #333333; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input:-moz-placeholder, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow input:-moz-placeholder { color: #333333; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow textarea, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow textarea { background-color: #ffffff !important; color: #333333 !important; border-color: #cccccc; border-radius: 4px !important; border-style: solid !important; border-width: 1px !important; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif; font-size: 14px !important; height: auto; line-height: 21px !important; margin-bottom: 0; margin-top: 0; padding: 10px 10px !important; width: 100% !important; box-sizing: border-box !important; max-width: 100% !important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before { border-color: #cccccc!important; background-color: #ffffff!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input.custom-control-input[type=”checkbox”]{ box-sizing: border-box; padding: 0; position: absolute; z-index: -1; opacity: 0; margin-top: 5px; margin-left: -1.5rem; overflow: visible; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before { border-radius: 4px!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow input[type=checkbox]:checked~.label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox input[type=checkbox]:checked~.label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-input:checked~.custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-input:checked~.custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox input[type=checkbox]:checked~.label-description::after { background-image: url(“data:image/svg+xml,%3csvg xmlns=’http://www.w3.org/2000/svg’ viewBox=’0 0 8 8’%3e%3cpath fill=’%23fff’ d=’M6.564.75l-3.59 3.612-1.538-1.55L0 4.26 2.974 7.25 8 2.193z’/%3e%3c/svg%3e”); } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input:checked~.custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input:checked~.custom-control-label::after { background-image: url(“data:image/svg+xml,%3csvg xmlns=’http://www.w3.org/2000/svg’ viewBox=’-4 -4 8 8’%3e%3ccircle r=’3′ fill=’%23fff’/%3e%3c/svg%3e”); } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox input[type=checkbox]:checked~.label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox input[type=checkbox]:checked~.label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow input[type=checkbox]:checked~.label-description::before { border-color: #000000!important; background-color: #000000!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label::after { top: 2px; box-sizing: border-box; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { top: 0px!important; box-sizing: border-box!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { top: 0px!important; box-sizing: border-box!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::after { top: 0px!important; box-sizing: border-box!important; position: absolute; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::before { top: 0px!important; box-sizing: border-box!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-control-label::before { position: absolute; top: 4px; left: -1.5rem; display: block; width: 16px; height: 16px; pointer-events: none; content: “”; background-color: #ffffff; border: #adb5bd solid 1px; border-radius: 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-control-label::after { position: absolute; top: 2px!important; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before { position: absolute; top: 4px; left: -1.5rem; display: block; width: 16px; height: 16px; pointer-events: none; content: “”; background-color: #ffffff; border: #adb5bd solid 1px; border-radius: 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::after { position: absolute; top: 0px!important; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { position: absolute; top: 0px!important; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-radio .custom-control-label::after { background: no-repeat 50%/50% 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-checkbox .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { background: no-repeat 50%/50% 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-control, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-control { position: relative; display: block; min-height: 1.5rem; padding-left: 1.5rem; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-input, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-input, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-input { position: absolute; z-index: -1; opacity: 0; box-sizing: border-box; padding: 0; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label { color: #000000; font-size: 12px!important; font-family: ‘Open Sans’, Arial, Helvetica, sans-serif; line-height: 22px; margin-bottom: 0; position: relative; vertical-align: top; font-style: normal; font-weight: 700; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-select, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-select { background-color: #ffffff !important; color: #333333 !important; border-color: #cccccc; border-radius: 4px !important; border-style: solid !important; border-width: 1px !important; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif; font-size: 14px !important; line-height: 20px !important; margin-bottom: 0; margin-top: 0; padding: 10px 28px 10px 12px !important; width: 100% !important; box-sizing: border-box !important; max-width: 100% !important; height: auto; display: inline-block; vertical-align: middle; background: url(‘https://assets.mlcdn.com/ml/images/default/dropdown.svg’) no-repeat right .75rem center/8px 10px; -webkit-appearance: none; -moz-appearance: none; appearance: none; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow { height: auto; width: 100%; float: left; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .ml-input-horizontal { width: 70%; float: left; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .ml-button-horizontal { width: 30%; float: left; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .ml-button-horizontal.labelsOn { padding-top: 25px; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .horizontal-fields { box-sizing: border-box; float: left; padding-right: 10px; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow input { background-color: #ffffff; color: #333333; border-color: #cccccc; border-radius: 4px; border-style: solid; border-width: 1px; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif; font-size: 14px; line-height: 20px; margin-bottom: 0; margin-top: 0; padding: 10px 10px; width: 100%; box-sizing: border-box; overflow-y: initial; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow button { background-color: #000000 !important; border-color: #000000; border-style: solid; border-width: 1px; border-radius: 4px; box-shadow: none; color: #ffffff !important; cursor: pointer; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif; font-size: 14px !important; font-weight: 700; line-height: 20px; margin: 0 !important; padding: 10px !important; width: 100%; height: auto; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow button:hover { background-color: #1F5014 !important; border-color: #1F5014 !important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow input[type=”checkbox”] { box-sizing: border-box; padding: 0; position: absolute; 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Now that our company has been established, raw materials and fixed assets procured, and first sales made, it appears that our company is moving toward the right direction. We can take a breath … for now.

Next, we are going to take a slightly longer view, and prepare for next year. 

To make sure we are ready for next year’s operations, we will prepay 1.5 million dollars to our supplier and secure raw material supplies. Since 1.5 million dollars are prepaid, our cash position is reduced by this amount. At the same time, we should record 1.5 million dollars as prepaid accounts because we have the right to receive goods from the supplier in the future, making it an asset. After this economic activity, we can see that the the total amount of assets is not changed. 

During this year while we were selling our products, our company also spent 4 million dollars in cash, 2.5 of which on salaries of sales personnel and sales related expenses, and 1.5 of which on salaries of managers and managerial expenses. Our cash position was further reduced by 4 million dollars on the balance sheet. At the same time, we should put the 2.5 million dollars under operating expenses, and 1.5 million dollars under administrative expenses.

Next, we’ve decided to invest half a million dollars to developing a pollution treatment technology, which is a research and development activity. How does this affect our financial statements?

Well, it’s easy to know that our cash is further reduced by 500,000 dollars on the balance sheet. On the surface, we might be tempted to put 500,000 dollars under intangible asset, since technology appears to be a type of intangible asset. However, this is actually wrong. Let’s see why that is the case.

The accounting principles stipulate that R&D expenses shall be recorded as expenses, specifically, administrative expenses in the Income Statement. If and only if the R&D is in the product development stage and it meets certain criteria could it be recorded under intangible assets. Here research means the true, hardcore development of a new technology, and product development means things like design of packages, etc., that happens after the development of the core tech.

The accounting principles also stipulate that after we successfully developed a technology and applied for a patent, ONLY the application fees for the patent may be recorded in intangible assets. For example, if we spent 500,000 dollars in researching a technology and another 5,000 dollars on the patent application, only the 5,000 can be recorded in intangible assets.

This might seem strange, and unreasonable at first glance. We all think that research and development is actually a thing that impacts long-term development of a company in the future, and because of that, we should record it as an asset item – intangible asset.

The reason it doesn’t work that way is that R&D is an activity with high uncertainty. When a tech is being developed in the lab, it’s very difficult to say whether it will be successfully productized and commercialized. Let us look at some data.

For the American pharmaceutical industry, the average length of drug development is about 14.9 years with the cost of around 500 million dollars, among which 200 million is invested before the clinical experiment stage. However, only 18% of all drugs can actually enter the clinical experiment stage, meaning that 82% of all drug development investments are pure expenses.

This stat shows that R&D activity has crazy high uncertainty. The accounting profession, however, hates uncertainty, and whenever there appears uncertainty, accounting will treat it as – failure, by default, even if there is still chance for it to succeed.

And that is why all R&D activities are treated as expenses, i.e. useless for the future.

Now let’s go back to our company and push the scenario one step further. What if our 500,000 dollars of research investment does succeed, i.e. we have created a successful technology? Can we record it in intangible assets?

Unfortunately, still no.

The reason is that technological success does NOT equal commercial success. We can see lots of examples that a technology creates no commercial value at last. So it still has considerable uncertainty even after the tech is developed.

Lastly, the accounting principles stipulate that technology purchased externally should be recorded in intangible assets. The reason is that our purchase equals our acknowledgment in the commercial value of the tech, so only by then could we record it with a value equal to the purchase price. 

From the aforementioned three principles on R&D, we see that research itself will not result in increase of intangible assets. Looking reversely, if there is indeed intangible asserts such as technology in a company’s balance sheet, it almost always means that the company has purchased the tech from external parties. 

We can further draw a conclusion that all self-generated intangible assets of the company will not be reflected on the balance sheet. Let’s look at another example.

Say we want to invest in building a brand for our product by investing in advertisements. When we pay for the ads, the ad costs go into operating expenses. We will never record these types of costs as intangible assets for the reason that we have no idea how much value of intangible assets can be created by the ads we make.

This is not to say that self-generated intangible assets are worthless. On the contrary, these assets are at the very core of a company’s competence, but are left off the balance sheet. In other words, a company will have many important off-balance-sheet assets. For example, a company may own important technology, brands as well as other valuable assets that according to accounting principles, must be left off the balance sheet. These “assets” are valuable and important, but because of their uniqueness, their values are hard to determine.

Then what are the intangible assets that we see on the balance sheet? They are all purchased from others by the company. 

This unique characteristic of intangible assets being off the statement and valuable at the same time can be used by companies for their own advantages. For example, sometimes a company might need to reflect their R&D investment in the balance sheet, and to do so they might sell the technology and buy it back. But most companies would not do something like this; instead, a more common way is that the company will establish a separate entity – an independent R&D subsidiary – to handle all the R&D. The company will then procure technology from this independent legal entity, resulting in the R&D cost showing up as intangible assets on the company’s balance sheet.

From this example, we see that the accounting principles stay the same. But by using different organizational structures, we can get different results. There is no good or bad in either practice; different companies might pursue different practices to suit their objectives. For some very profitable companies, for instance, they may prefer to record R&D as expenses so they could reduce the tax burdens. For some other companies, e.g. startups, they might want to record R&D as intangible assets so their profits look good. 

So coming back to our original case, the 500,000 dollars research expense will cause a corresponding dip of cash in balance sheet. We should also record this amount as administrative expense in the income statement. 

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From our previous episodes of using our fictional company to learn how economic activities impact the balance sheet (episode #14 and #15), our company has procured raw materials, invested in fixed assets, and has hired labor to produce goods. Now that our products are produced, it is time for us to sell them.

Let’s say our company has landed a client and signed the contract with the customer for a sum of 43 million dollars. While trying to land this contract, we agreed that the client would only need to pay 30 million dollars for receiving the products. The other 13 million dollars will be paid in another few months once all the implementation and running are done. The total cost of these goods is 31 million dollars. 

Let’s see how the economic activity affects financial statements.

How sales affect balance sheet and income statement

This economic activity is a little bit complicated, so let’s review it from the beginning.

First, we signed a contract of 43 million dollars with the customer and delivered the goods to the customer. But the customer has only paid us 30 million dollars at the time of the transaction. Should we record 43 million or 30 million as our revenue on the Income Statement?

The answer is 30 million dollars. But why is that?

When discussing the basic ideas about Income Statement, we have mentioned that the recognition of revenue does not necessarily require receiving cash. Recognition of revenue depends on how much the customer agrees to pay, and whether the goods or services are transferred to the customer. 

In this example, our company has already sent the goods to the customer, so the ownership has been transferred, even though they agreed to pay only partial of the total price at the time of transaction. So in this case, revenue should be 43 million dollars, not just the 30 million cash that we received.

But where are the other 13 million dollars?

Well, because we granted the customer a few months of time for them to pay, this 13 million dollars are recorded as accounts receivable on the balance sheet.

Is this the whole transaction? Not yet.

Before we made the sales, our products have already been manufactured and stored in the warehouse as inventory. Once we made the sales, the goods no longer belong to us, meaning that we should deduct the cost of these products from inventory.  At the same time, we should put the same number in cost of goods sold.

The whole transaction is now complete. However, for the observant eyes, a new problem has appeared. Let’s take a look at the assets first. 

After this transaction, our cash increased by 30 million dollars, and our accounts receivable increased by 13 million dollars. At the same time, our inventory decreased by 31 million dollars, resulting in a total increase of 12 million dollars worth of assets.

However there is no change in liabilities or shareholders’ equity. 

The basic formula that assets equal liabilities plus shareholders’ equity seems to be broken.

We’ve mentioned that this formula must be obeyed at all times, and when it’s not balanced, the only reason will be that the balance sheet is done incorrectly. 

So did we actually miss anything?

As a matter of fact, we didn’t. 

What happened to the company is that when we sold our 31 million dollars worth of products for 43 million dollars, we made a profit for the sales. After deducting expenses and taxes, etc., and after profit distribution to the shareholders, we get undistributed profit, which belongs to shareholders’ equity on the balance sheet.

Our current status is only temporary; once we finish the distribution of profits, we will see how the balance sheet got balanced – again. 

How to understand undistributed profit

We can take undistributed profit as an integrated substitution of the whole Income Statement and profit distribution. That is to say, we can use the amount of undistributed profit to replace the entire Income Statement and the process of profit distribution. After we deduct profit distribution, we will get an undistributed profit, which will be recorded on the balance sheet. The Balance Sheet will then become balanced again. 

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letter-spacing: normal !important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper { background-color: #f6f6f6; border-width: 0px; border-color: transparent; border-radius: 4px; border-style: solid; box-sizing: border-box; display: inline-block !important; margin: 0; padding: 0; position: relative; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper.embedPopup, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper.embedDefault { width: 100%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper.embedForm { max-width: 100%; width: 100%; } #mlb2-14362251.ml-form-embedContainer .ml-form-align-left { text-align: left; } #mlb2-14362251.ml-form-embedContainer .ml-form-align-center { text-align: center; } #mlb2-14362251.ml-form-embedContainer .ml-form-align-default { display: table-cell !important; vertical-align: middle !important; text-align: center !important; } #mlb2-14362251.ml-form-embedContainer .ml-form-align-right { text-align: right; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedHeader img { border-top-left-radius: 4px; border-top-right-radius: 4px; height: auto; margin: 0 auto !important; max-width: 100%; width: 990px; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-successBody { padding: 20px 20px 0 20px; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody.ml-form-embedBodyHorizontal { padding-bottom: 0; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedContent, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-successBody .ml-form-successContent { text-align: left; margin: 0 0 20px 0; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedContent h4, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-successBody .ml-form-successContent h4 { color: #1F5014; font-family: ‘Anton’, sans-serif; font-size: 30px; font-weight: 400; margin: 0 0 10px 0; text-align: center; word-break: break-word; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedContent p, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-successBody .ml-form-successContent p { color: #000000; font-family: ‘Palatino Linotype’, ‘Book Antiqua’, Palatino, serif; font-size: 18px; font-weight: 400; line-height: 24px; margin: 0 0 10px 0; text-align: center; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedContent ul, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedContent ol, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-successBody .ml-form-successContent ul, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-successBody .ml-form-successContent ol { color: #000000; font-family: ‘Palatino Linotype’, ‘Book Antiqua’, Palatino, serif; font-size: 18px; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedContent ol ol, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-successBody .ml-form-successContent ol ol { list-style-type: lower-alpha; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedContent ol ol ol, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-successBody .ml-form-successContent ol ol ol { list-style-type: lower-roman; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedContent p a, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-successBody .ml-form-successContent p a { color: #000000; text-decoration: underline; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-block-form .ml-field-group { text-align: left!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-block-form .ml-field-group label { margin-bottom: 5px; color: #333333; font-size: 14px; font-family: ‘Open Sans’, Arial, Helvetica, sans-serif; font-weight: bold; font-style: normal; text-decoration: none;; display: inline-block; line-height: 20px; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedContent p:last-child, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-successBody .ml-form-successContent p:last-child { margin: 0; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody form { margin: 0; width: 100%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-formContent, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow { margin: 0 0 20px 0; width: 100%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow { float: left; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-formContent.horozintalForm { margin: 0; padding: 0 0 20px 0; width: 100%; height: auto; float: left; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow { margin: 0 0 10px 0; width: 100%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow.ml-last-item { margin: 0; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow.ml-formfieldHorizintal { margin: 0; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input { background-color: #ffffff !important; color: #333333 !important; border-color: #cccccc; border-radius: 4px !important; border-style: solid !important; border-width: 1px !important; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif; font-size: 14px !important; height: auto; line-height: 21px !important; margin-bottom: 0; margin-top: 0; margin-left: 0; margin-right: 0; padding: 10px 10px !important; width: 100% !important; box-sizing: border-box !important; max-width: 100% !important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input::-webkit-input-placeholder, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow input::-webkit-input-placeholder { color: #333333; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input::-moz-placeholder, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow input::-moz-placeholder { color: #333333; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input:-ms-input-placeholder, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow input:-ms-input-placeholder { color: #333333; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input:-moz-placeholder, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow input:-moz-placeholder { color: #333333; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow textarea, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow textarea { background-color: #ffffff !important; color: #333333 !important; border-color: #cccccc; border-radius: 4px !important; border-style: solid !important; border-width: 1px !important; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif; font-size: 14px !important; height: auto; line-height: 21px !important; margin-bottom: 0; margin-top: 0; padding: 10px 10px !important; width: 100% !important; box-sizing: border-box !important; max-width: 100% !important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before { border-color: #cccccc!important; background-color: #ffffff!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input.custom-control-input[type=”checkbox”]{ box-sizing: border-box; padding: 0; position: absolute; z-index: -1; opacity: 0; margin-top: 5px; margin-left: -1.5rem; overflow: visible; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before { border-radius: 4px!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow input[type=checkbox]:checked~.label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox input[type=checkbox]:checked~.label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-input:checked~.custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-input:checked~.custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox input[type=checkbox]:checked~.label-description::after { background-image: url(“data:image/svg+xml,%3csvg xmlns=’http://www.w3.org/2000/svg’ viewBox=’0 0 8 8’%3e%3cpath fill=’%23fff’ d=’M6.564.75l-3.59 3.612-1.538-1.55L0 4.26 2.974 7.25 8 2.193z’/%3e%3c/svg%3e”); } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input:checked~.custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input:checked~.custom-control-label::after { background-image: url(“data:image/svg+xml,%3csvg xmlns=’http://www.w3.org/2000/svg’ viewBox=’-4 -4 8 8’%3e%3ccircle r=’3′ fill=’%23fff’/%3e%3c/svg%3e”); } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox input[type=checkbox]:checked~.label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox input[type=checkbox]:checked~.label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow input[type=checkbox]:checked~.label-description::before { border-color: #000000!important; background-color: #000000!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label::after { top: 2px; box-sizing: border-box; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { top: 0px!important; box-sizing: border-box!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { top: 0px!important; box-sizing: border-box!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::after { top: 0px!important; box-sizing: border-box!important; position: absolute; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::before { top: 0px!important; box-sizing: border-box!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-control-label::before { position: absolute; top: 4px; left: -1.5rem; display: block; width: 16px; height: 16px; pointer-events: none; content: “”; background-color: #ffffff; border: #adb5bd solid 1px; border-radius: 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-control-label::after { position: absolute; top: 2px!important; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before { position: absolute; top: 4px; left: -1.5rem; display: block; width: 16px; height: 16px; pointer-events: none; content: “”; background-color: #ffffff; border: #adb5bd solid 1px; border-radius: 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::after { position: absolute; top: 0px!important; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { position: absolute; top: 0px!important; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-radio .custom-control-label::after { background: no-repeat 50%/50% 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-checkbox .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { background: no-repeat 50%/50% 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-control, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-control { position: relative; display: block; min-height: 1.5rem; padding-left: 1.5rem; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-input, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-input, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-input { position: absolute; z-index: -1; opacity: 0; box-sizing: border-box; padding: 0; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label { color: #000000; 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If someone says that he can increase the gross profit by just expanding manufacturing without selling more products, would you believe him?

He certainly sounds like a hustler. But before we jump into the conclusion, let’s take a deeper look at what the problem really is here.

What are included in the manufacturing cost? 

Manufacturing cost includes raw materials, direct labor and manufacturing expenses. The first two are pretty easy to understand. Manufacturing expenses include water and electricity expenses in the workshops, and the depreciation of the plant and equipment. 

Manufacturing cost can be generally divided into two categories: variable cost and fixed cost.

What is variable cost

Variable cost refers to costs that increase with production volume. In other words, to produce one more product, one more unit of cost occurs. 

Obviously, raw materials belong to variable cost, because to produce one more product, we must invest one more unit of raw material.

What is fixed cost

Fixed cost refers to costs that stay the same no matter how many products are produced, to some extent. 

It’s easy to find out that depreciation of plant and equipment belongs to fixed cost. No matter how many products are produced,

the expenses for the plant and equipment are always the same, and unless we produce significantly more products, they will not change as our plant produces more units of goods.

Direct labor

So we may say raw materials cost belongs to variable cost, while depreciation belongs to fixed cost. What kind of cost does direct labor belong to?

Well, it depends on how our company pays employees. If a fixed wage is paid regardless of how many units of goods are produced by a worker, direct labor is a fixed cost; if wage is paid per number of units produced, direct labor is a variable cost.

In practice, it is often partially fixed and partially variable.

The importance of dividing manufacturing costs into two groups

Dividing manufacturing costs into separate groups can have fundamental impact on the decision making of our company.

For example, suppose our company produces Stanley cups with a unit variable cost of 60 dollars. We further allocate 40 dollars of fixed cost to each cup. The average total cost per unit is then 100 dollars.

If a potential client places an order for 80 dollars per cup to our company, shall we accept the order?

From the surface, and from the perspective of costs, we should reject the offer because the average cost per cup is higher than the offer. We will lose 20 dollars each cup for the order. However, our alternative of declining the offer is actually losing 40 dollars: 

since the fixed costs will always be there, regardless of our production status, every minute we are not producing anything is a minute of losing fixed cost. Even if my output is 0, the total fixed cost is still the same.

From this analysis, it might appears to you that accepting the order would result in a reduction of 20 dollars loss per unit (from -40 to -20). So obviously we should accept the order.

Form the above example we can conclude that it is important to differentiate variable cost from fixed cost. Now let’s look at another example.

Is higher gross profit always a good thing?

Our company produced 1000 products this year. Let’s assume this product is high-tech and high value, and it costs us 10,000 dollars of variable cost per unit, resulting in a total of 10 million dollars of variable cost. Additionally, we’ve also invested 10 million dollars of fixed cost, so our total manufacturing cost is 20 million dollars. We got really lucky and sold all 1000 pieces. 

Now, let’s analyze what happened here on our financial statements.

Before we sold any product and after we manufactured all products, the 1000 units were recorded under inventory with a value of 20 million dollars, which is the cost incurred for producing the products. When the products were sold, the 20 million dollar worth of inventory got transferred from inventory (Balance Sheet) to cost of goods sold(Income Statement). 

In the second year, we’ve decided to double down in this market. We predict that the market will keep growing and there will be even more demand, so we decide to produce 2000 units in the second year.

Our variable costs will increase to 20 million dollars this year as a result. Our fixed costs, on the other hand, will stay the same. Therefore, our total manufacturing costs have become 30 million dollars.

However, we’ve unfortunately predicted the market trend incorrectly, and have failed to sell the 2000 units of products. Instead, sales this year stay the same as last year at 1000 units. The other 1000 units of products stay as inventory in our warehouse.

Let’s do some analysis here. The 30 million manufacturing cost is originally recorded in inventory. At the time of selling the 1000 units, this portion of inventory is transferred from inventory to cost of goods sold. Because we’ve produced 2000 units and only sold 1000, exactly 50% of inventory will be transferred into cost of goods sold, which is 15 million dollars. And because our sales are still the same at 1000 units, assuming our unit price stays the same, our gross profit actually increases because of the lower cost of goods sold! To be exact, 5 million dollars more!

This result can be baffling to many. If we produce more products but fail to sell more, our gross profit is indeed increased. But any person with some level of common sense will know having too much inventory is bad, not good, for the company.

The explanation

By reading this post, you will be able to understand the reason, which is that because the fixed costs stay the same in both years, the per unit fixed cost got reduced with the increase of manufactured products. And because only 50% of products are sold, only that portion of fixed costs got transferred to cost of goods sold. The other 50% stays as inventory, until they get sold in the future. So even if our revenue stays the same, producing more units of products can actually increase our gross profit.

By now you might have found a problem: normally we think that our firm is more profitable if the gross profit is higher. However

the firm in the above example predicts the market trend incorrectly in the second year, and manufactures too many products, resulting in over-production. If you are asked to judge how the firm’s performance is in the second year, I am sure that you would say it is poor. However, its gross profit is indeed higher.

The conclusion is that we cannot simply take an increase in gross profit as sign of better performance. Growth in gross profit should be interpreted together with the value of finished goods inventory. If gross profit and finished goods increase simultaneously, the increase in gross profit does not necessarily mean a better performance, and we should take it with a grain of salt.

For the same reason, if gross profit and finished goods decrease simultaneously, it could mean that the company is selling lots of finished goods from the inventory, which is almost always a good thing. 

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background-color: #ffffff!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow input.custom-control-input[type=”checkbox”]{ box-sizing: border-box; padding: 0; position: absolute; z-index: -1; opacity: 0; margin-top: 5px; margin-left: -1.5rem; overflow: visible; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before { border-radius: 4px!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow input[type=checkbox]:checked~.label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox input[type=checkbox]:checked~.label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-input:checked~.custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-input:checked~.custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox input[type=checkbox]:checked~.label-description::after { background-image: url(“data:image/svg+xml,%3csvg xmlns=’http://www.w3.org/2000/svg’ viewBox=’0 0 8 8’%3e%3cpath fill=’%23fff’ d=’M6.564.75l-3.59 3.612-1.538-1.55L0 4.26 2.974 7.25 8 2.193z’/%3e%3c/svg%3e”); } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input:checked~.custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input:checked~.custom-control-label::after { background-image: url(“data:image/svg+xml,%3csvg xmlns=’http://www.w3.org/2000/svg’ viewBox=’-4 -4 8 8’%3e%3ccircle r=’3′ fill=’%23fff’/%3e%3c/svg%3e”); } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-input:checked~.custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox input[type=checkbox]:checked~.label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox input[type=checkbox]:checked~.label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow input[type=checkbox]:checked~.label-description::before { border-color: #000000!important; background-color: #000000!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label::after { top: 2px; box-sizing: border-box; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { top: 0px!important; box-sizing: border-box!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { top: 0px!important; box-sizing: border-box!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::after { top: 0px!important; box-sizing: border-box!important; position: absolute; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::before { top: 0px!important; box-sizing: border-box!important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-control-label::before { position: absolute; top: 4px; left: -1.5rem; display: block; width: 16px; height: 16px; pointer-events: none; content: “”; background-color: #ffffff; border: #adb5bd solid 1px; border-radius: 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-control-label::after { position: absolute; top: 2px!important; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::before, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::before { position: absolute; top: 4px; left: -1.5rem; display: block; width: 16px; height: 16px; pointer-events: none; content: “”; background-color: #ffffff; border: #adb5bd solid 1px; border-radius: 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::after { position: absolute; top: 0px!important; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { position: absolute; top: 0px!important; left: -1.5rem; display: block; width: 1rem; height: 1rem; content: “”; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-radio .custom-control-label::after { background: no-repeat 50%/50% 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .custom-checkbox .custom-control-label::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedPermissions .ml-form-embedPermissionsOptionsCheckbox .label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-interestGroupsRow .ml-form-interestGroupsRowCheckbox .label-description::after, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description::after { background: no-repeat 50%/50% 50%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-control, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-control { position: relative; display: block; min-height: 1.5rem; padding-left: 1.5rem; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-input, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-input, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-input, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-input { position: absolute; z-index: -1; opacity: 0; box-sizing: border-box; padding: 0; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-radio .custom-control-label, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-radio .custom-control-label, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-checkbox .custom-control-label, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-checkbox .custom-control-label { color: #000000; font-size: 12px!important; font-family: ‘Open Sans’, Arial, Helvetica, sans-serif; line-height: 22px; margin-bottom: 0; position: relative; vertical-align: top; font-style: normal; font-weight: 700; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-fieldRow .custom-select, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow .custom-select { background-color: #ffffff !important; color: #333333 !important; border-color: #cccccc; border-radius: 4px !important; border-style: solid !important; border-width: 1px !important; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif; font-size: 14px !important; line-height: 20px !important; margin-bottom: 0; margin-top: 0; padding: 10px 28px 10px 12px !important; width: 100% !important; box-sizing: border-box !important; max-width: 100% !important; height: auto; display: inline-block; vertical-align: middle; background: url(‘https://assets.mlcdn.com/ml/images/default/dropdown.svg’) no-repeat right .75rem center/8px 10px; -webkit-appearance: none; -moz-appearance: none; appearance: none; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow { height: auto; width: 100%; float: left; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .ml-input-horizontal { width: 70%; float: left; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .ml-button-horizontal { width: 30%; float: left; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .ml-button-horizontal.labelsOn { padding-top: 25px; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .horizontal-fields { box-sizing: border-box; float: left; padding-right: 10px; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow input { background-color: #ffffff; color: #333333; border-color: #cccccc; border-radius: 4px; border-style: solid; border-width: 1px; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif; font-size: 14px; line-height: 20px; margin-bottom: 0; margin-top: 0; padding: 10px 10px; width: 100%; box-sizing: border-box; overflow-y: initial; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow button { background-color: #000000 !important; border-color: #000000; border-style: solid; border-width: 1px; border-radius: 4px; box-shadow: none; color: #ffffff !important; cursor: pointer; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif; font-size: 14px !important; font-weight: 700; line-height: 20px; margin: 0 !important; padding: 10px !important; width: 100%; height: auto; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-horizontalRow button:hover { background-color: #1F5014 !important; border-color: #1F5014 !important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow input[type=”checkbox”] { box-sizing: border-box; padding: 0; position: absolute; z-index: -1; opacity: 0; margin-top: 5px; margin-left: -1.5rem; overflow: visible; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow .label-description { color: #000000; display: block; font-family: ‘Open Sans’, Arial, Helvetica, sans-serif; font-size: 12px; text-align: left; margin-bottom: 0; position: relative; vertical-align: top; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow label { font-weight: normal; margin: 0; padding: 0; position: relative; display: block; min-height: 24px; padding-left: 24px; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow label a { color: #000000; text-decoration: underline; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow label p { color: #000000 !important; font-family: ‘Open Sans’, Arial, Helvetica, sans-serif !important; font-size: 12px !important; font-weight: normal !important; line-height: 18px !important; padding: 0 !important; margin: 0 5px 0 0 !important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow label p:last-child { margin: 0; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedSubmit { margin: 0 0 20px 0; float: left; width: 100%; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedSubmit button { background-color: #000000 !important; border: none !important; border-radius: 4px !important; box-shadow: none !important; color: #ffffff !important; cursor: pointer; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif !important; font-size: 14px !important; font-weight: 700 !important; line-height: 21px !important; height: auto; padding: 10px !important; width: 100% !important; box-sizing: border-box !important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedSubmit button.loading { display: none; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-embedSubmit button:hover { background-color: #1F5014 !important; } .ml-subscribe-close { width: 30px; height: 30px; background: url(‘https://assets.mlcdn.com/ml/images/default/modal_close.png’) no-repeat; background-size: 30px; cursor: pointer; margin-top: -10px; margin-right: -10px; position: absolute; top: 0; right: 0; } .ml-error input, .ml-error textarea, .ml-error select { border-color: red!important; } .ml-error .custom-checkbox-radio-list { border: 1px solid red !important; border-radius: 4px; padding: 10px; } .ml-error .label-description, .ml-error .label-description p, .ml-error .label-description p a, .ml-error label:first-child { color: #ff0000 !important; } #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow.ml-error .label-description p, #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-checkboxRow.ml-error .label-description p:first-letter { color: #ff0000 !important; } @media only screen and (max-width: 400px){ .ml-form-embedWrapper.embedDefault, .ml-form-embedWrapper.embedPopup { width: 100%!important; } .ml-form-formContent.horozintalForm { float: left!important; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow { height: auto!important; width: 100%!important; float: left!important; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .ml-input-horizontal { width: 100%!important; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .ml-input-horizontal > div { padding-right: 0px!important; padding-bottom: 10px; } .ml-form-formContent.horozintalForm .ml-button-horizontal { width: 100%!important; } .ml-form-formContent.horozintalForm .ml-button-horizontal.labelsOn { padding-top: 0px!important; } } .ml-mobileButton-horizontal { display: none; } #mlb2-14362251 .ml-mobileButton-horizontal button { background-color: #000000 !important; border-color: #000000 !important; border-style: solid !important; border-width: 1px !important; border-radius: 4px !important; box-shadow: none !important; color: #ffffff !important; cursor: pointer; font-family: ‘Lucida Sans Unicode’, ‘Lucida Grande’, sans-serif !important; font-size: 14px !important; font-weight: 700 !important; line-height: 20px !important; padding: 10px !important; width: 100% !important; } @media only screen and (max-width: 400px) { #mlb2-14362251.ml-form-embedContainer .ml-form-embedWrapper .ml-form-embedBody .ml-form-formContent.horozintalForm { padding: 0 0 10px 0 !important; } .ml-hide-horizontal { display: none !important; } .ml-form-formContent.horozintalForm .ml-button-horizontal { display: none!important; } .ml-mobileButton-horizontal { display: inline-block !important; margin-bottom: 20px;width:100%; } .ml-form-formContent.horozintalForm .ml-form-horizontalRow .ml-input-horizontal > div { padding-bottom: 0px !important; } } @media only screen and (max-width: 400px) { .ml-form-formContent.horozintalForm .ml-form-horizontalRow .horizontal-fields { margin-bottom: 10px !important; width: 100% !important; } }

function ml_webform_success_14362251() { var $ = ml_jQuery || jQuery; $(‘.ml-subscribe-form-14362251 .row-success’).show(); $(‘.ml-subscribe-form-14362251 .row-form’).hide(); } fetch(“https://assets.mailerlite.com/jsonp/918262/forms/119753320103413631/takel”)