IGNITE EXTENDED / LESSON 17
How does each transaction change the statements?
A reconciled transaction analysis and closing statements.
The supplied case begins in 2022 with 13 million shares issued for $2 each. Cash and paid-in capital increase by $26 million. The company also issues 2 million shares for brand rights. Using the same $2 fair-value benchmark gives a $4 million brand asset and a $4 million equity contribution.
The second exchange creates no cash flow. It increases recognized assets and equity under the stated valuation assumption. This distinction is necessary when preparing the cash-flow statement: total contributed capital is $30 million, while cash from the equity issue is $26 million.
On April 1 the company pays $12 million for a twelve-month lease. At payment, cash decreases and a prepaid asset increases. By December 31, nine months of service have been consumed. Lease expense is $9 million and the remaining prepaid asset is $3 million.
The July 1 loan adds $6 million of cash and debt. Interest accrues for six months even though the first payment is not due until the following June. At 10% annually, the interest expense and payable are $0.3 million. The loan principal is not revenue, and the unpaid interest is still an expense.
Assets equal liabilities plus total stockholders' equity, and for each transaction the change in assets equals the change in liabilities plus the change in equity.
This is the only rule the transaction table needs. If a row does not balance, an effect is missing; never close the gap with a plug.
Events in $ thousands: January 1, 13M shares issued for $2 cash plus 2M shares for brands; April 1, $12,000 paid for a one-year lease; July 1, $6,000 borrowed (3 years, 10%, interest paid annually); summer, $3,000 spent on product development; fall, $23,000 of products delivered, $9,600 of it still unpaid; December, a $1,000 contract signed. Year-end: 9 months of the lease used, 6 months of interest accrued.
The lecture deck dates these events in 2021 (lease April 1, 2021 to March 31, 2022); the updated case and this lesson's slides use 2022. The amounts are identical, so only the dates differ. Each event is a cash event, a non-cash event, or a year-end adjustment; sort them before recording.
Cash +26,000 and brands +4,000 on the asset side; contributed capital +26,000 and +4,000 on the claims side.
Only $26,000 is cash. The $4,000 brand asset depends on valuing the shares at the $2 cash price. That is a measurement judgment, and it never appears in the cash-flow statement.
Cash -12,000 and prepaid lease +12,000. The page defines an asset as a probable and reasonably measurable future economic benefit resulting from a past transaction.
Paying is not expensing. The payment buys a 12-month right to use the facility, so it is an asset that is used up over time. This mirrors Relay's prepayment from the customer's side: the clinic's prepaid asset is Relay's deferred revenue.
An adjustment row: prepaid lease -9,000 and retained earnings (expenses) -9,000, because nine months of the lease term expired by year-end.
The adjustment involves no cash. It moves cost from the balance sheet to the income statement as the benefit is consumed. Relay's monthly revenue entry is the mirror image: it moves deferred revenue to revenue as service is delivered.
The company sells and ships $23 million of product. Of that revenue, $9.6 million remains uncollected at year-end. Cash collected from these sales is therefore $13.4 million. The receivable preserves the difference between recognized revenue and customer receipts.
The $1 million contract signed in December calls for delivery in March 2023. Signing it does not create 2022 revenue in this case because the delivery obligation remains unfulfilled and no advance cash payment is stated. The $3 million research expenditure is treated as an expense in this teaching solution.
Amounts are in $ millions. Revenue of 23 less lease expense of 9, research expense of 3 and accrued interest of 0.3 produces income of 10.7. Operating cash is 13.4 collected from customers less 12 of lease payments and 3 of research payments, or negative 1.6.
The company has positive reported profit and negative operating cash flow in the same year. Customer credit, a prepaid lease and unpaid interest explain the difference. Financing supplies 32 of cash: 26 from shares and 6 from the loan. Closing cash is consequently 30.4.
Check: cash is 100 + 40 − 30 = 110. Profit of 30 is not the period’s cash increase.
Cash +6,000 and bank loan +6,000.
Borrowed cash is a financing inflow and a liability. It is not revenue and it does not change equity.
Interest payable +300 and retained earnings (expenses) -300 for 6 months of interest: 6,000 x 10% x 6/12.
The expense is recorded before any cash is paid because the cost has been incurred. Accruals and deferrals together make income reflect the period, not the payment calendar.
Selected reading: PDF pages 1, 2, 3
This teaching case asks you to translate a sequence of financing and operating events into connected financial statements. The central task is to separate cash timing from accounting recognition.
Some shares exchange for cash while others exchange for brand rights. Both affect capitalization, but only one creates a cash receipt.
The annual lease payment occurs before the full lease term has elapsed. The year-end statements must distinguish expense from the remaining prepaid benefit.
Delivered sales include an unpaid receivable. The separately signed future-delivery contract raises a different recognition question.
Accrued interest and other period adjustments connect the transaction record to the closing balance sheet, income statement and cash flow statement.
Selected reading: PDF pages 1, 2, 3
The exercise asks you to ignore tax and supplies a simplified set of events. Preserve those assumptions when reconciling the answer.
For each event, identify what changes on both sides of the accounting identity. An omitted non-cash event can distort the balance sheet without appearing in the cash schedule.
Recognized income does not establish that operating activity generated cash. Receivables and prepaid costs can create a financing need during a profitable period.
Lenders led by Viola Credit were told the AI app-development startup, once valued at $1.5 billion, projected about $220M of 2024 sales; an internal review cut the figure to about $55M, and reported 2023 sales of about $180M were reportedly restated to about $45M. The lenders declared a default and seized about $37M from the company's accounts. The company then entered insolvency proceedings in mid-2025.
Reports alleged that some sales were not genuine, including round-trip deals with India's VerSe Innovation, which VerSe denied. Revenue that is real eventually turns into cash or a collectible receivable. Reconciling recognized revenue to customer receipts and the receivables roll-forward, as this lesson does, is the test lenders and auditors applied.
Seed and Series A investors will tie Relay's revenue to bank deposits, deferred revenue to signed annual contracts, and ARR to live locations. Keeping the monthly entries clean is what lets those numbers survive diligence.
Sources: Silicon UK: Builder.ai sales collapse · Mobile World Live: Builder.ai files for bankruptcy following sales scandal
Use the embedded Radiation Shields case and the complete worked transaction discussion in this lesson. Amounts are $m. Cash equity 26; brand rights for shares 4 under the stated valuation assumption; annual lease paid April 1 is 12; July 1 borrowing is 6 at 10%; research paid is 3; delivered sales are 23, with 9.6 still receivable. A separate 1 contract delivers next year. Ignore tax and use the case’s included manufacturing-cost convention.
Calculate closing cash, prepaid lease, interest payable, income and total assets. Reconcile the cash-flow statement to the balance sheet.
On October 1 a clinic prepays $4,070 for 12 months of Relay ($399 x 12 x 0.85 = 4,069.80, rounded). Relay's fiscal year ends December 31. Relay's cost to serve is 20% of revenue (SMS, hosting, support), paid in cash monthly. The same quarter, a second clinic pays $399 at the start of each month. Relay's controller wants the entries, a Q4 mini income statement and balance sheet for these two clinics, and a check that the equation balances.
Produce a transaction table (assets = liabilities + equity) for both clinics from October 1 to December 31, including month-end entries, then mini statements and a one-line reconciliation of Q4 profit to Q4 cash.
How Relay's year-end deferred revenue follows from its 20 prepaid clinics (illustrative).
Twenty prepaid clinics represent 20 x $4,070 = $81,400 of annual contracts. If they signed evenly across the year, on average half of each contract remains unearned at year end, about $40,700, which matches the roughly $40,000 of deferred revenue in Relay's FY1 balance sheet.
A clinic that signed in December leaves about 11/12 of its fee deferred; one that signed in January leaves almost nothing. A year-end deferred revenue balance much larger than this pattern predicts means multi-year prepayments or revenue being recognized too slowly; a much smaller one means revenue may have been recognized too early.
A $4,070 annual prepay is a $4,070 liability on day one. Recording it as revenue overstates the quarter by $3,052.50, and in a fundraising deck it turns cash timing into apparent growth.
On October 1 Relay has booked a $4,070 contract and billed and collected $4,070, but recognized $0 of revenue. ARR at the list-equivalent rate is $4,070. Label which measure you report; investors check revenue against the deferred-revenue roll-forward.
If assets do not equal claims, an effect is missing, usually an accrual (unpaid interest), a deferral (unearned revenue) or a non-cash exchange (shares for brands). Find the transaction; do not add a balancing line.
A balanced Q4 transaction table for one prepaid and one monthly clinic, a mini income statement and balance sheet, and the profit-to-cash reconciliation through deferred revenue.
Next lesson: Financial statement analysis & business diagnosis
Check your understanding
Question 1
On October 1 a clinic prepays Relay $4,070 for 12 months. What is the correct entry on October 1?
Relay owes 12 months of service, so it records a liability. Revenue is recognized as the service is delivered. Booking all $4,070 as revenue on receipt is the classic error: it would overstate Q4 revenue by $3,052.50.
Question 2
Using the October 1 prepayment of $4,070, how much deferred revenue remains on Relay's balance sheet at December 31?
Three months are earned: 3 x 339.17 = 1,017.50 (exactly 3/12 of 4,070). The remaining 4,070 - 1,017.50 = 3,052.50 is still owed. $3,730.83 deducts only one month.
Question 3
Radiation Shields pays $12M on April 1 for a 12-month lease. Its fiscal year ends December 31. What are the lease expense for the year and the prepaid lease on December 31?
Nine months (April through December) have been used: 12 x 9/12 = 9 expensed, leaving 3 prepaid. Expensing the full payment confuses the cash payment with consumption of the benefit.
Question 4
Radiation Shields borrows $6M on July 1 at 10%, with interest paid annually. Nothing has been paid by December 31. What year-end entry is required?
Six months of interest have been incurred: 6 x 10% x 6/12 = 0.3. It is an expense of this year and a liability until it is paid. The 'no cash, no entry' answer is the misconception accrual accounting exists to correct.
Question 5
Relay issues 2,000 shares to a design firm in exchange for its brand identity work, valued at $2,000. How does this appear in the statements?
As with Radiation Shields' brand exchange, equity increases without cash. Whether the work is capitalized or expensed depends on what was received. Putting it in financing cash flow would overstate cash, the same error that adds $4M in the case.
Question 6
Relay's controller reports Q4 profit of $1,771.60 for the two clinics and a cash increase of $4,824.10. Which item reconciles the two?
Cash collected in advance and not yet earned raises cash without raising profit: 1,771.60 + 3,052.50 = 4,824.10. A receivable would work in the opposite direction, with revenue ahead of cash.
Workbook
Module output: A linked financial analysis, operating forecast, valuation and staged-investment decision.
Sources
Original pages and full documents are in the Library edition.