Accounting Basics forVirtual Enterprise Firms

Crystal Andersen & Rayon PiperDeloitte & Touche LLPVirtual Enterprise Volunteers

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1 i 1 I ! 1 I i ! I I I a 1 11 I ► 1 I I 1 i i I , i I i ! I

Accounting Basics forVirtual Enterprise Firms

Crystal Andersen & Rayon PiperDeloitte & Touche LLPVirtual Enterprise Volunteers

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▪ Accounting Basics▪ Business Plan Requirements

▪ Balance Sheet

▪ Income Statement

▪ Break-even Analysis

• Cash Flow Statement

▪ Accounting Forms Available on the VEC Web Site

▪ World Wide Lamps - Case Study. Journal Entries

▪ Financial Statements

▪ VEC Bank▪ Elements of an Annual Report

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A ccountin , Basics -Balance Sheet

ASSETS = LIABILITIES t EQUITY

The total amount of assets MUSTbe equalto the total amount of liabilities plusequity,

NOTE: Important for Balance Sheet preparation

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AccountingBasics -Balance Sheet

. Assets are anything owned or controlled by a company, andmay be tangible or intangible.(i.e. Cash, Furniture, Accounts Receivable)

. Liabilities are amounts that are owed, but may not necessarilyrequire immediate payment.(i.e. Notes Payable, Accounts Payable, Accruals for Expenses)

. Equity represents the owner(s) or investor(s) interest in thebusiness.(i.e. Common Stock, Paid-in-Capital, Retained Earnings)

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ccounting Basics -Income Statement

. Revenue: income earned by a business from itsoperations; revenue increases owners' equity.

. Expenses: the cost of the goods and servicesthat are used to operate a business; expensesdecrease owners' equity.

. Net income: the difference between revenuesand expenses for a given time period.

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___How do weorganize this information?

PayrollNote PayableComputers

Paid-in-CapitalMoney received for audit service

Accounts ReceivableInterest

RentMoney received for sale of shoes

FurnitureRetained Earnings

CashAccount Payable

UtilitiesCommon Stock

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AccountClassification

. Asset

. Liability

. Equity▪ Revenue• Expense

How do weorganize this information?

Assets Equity ExpenseComputers Paid-in-Capital PayrollAccounts receivable Retained Earnings RentFurniture Common Stock UtilitiesCash Interest

RevenueMoney received for audit serviceMoney received for sale of shoesInterest

LiabilitiesNote payableAccounts Payable

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Business Plan Requirement; Balance Sheet

World Wide LampsBalance Sheet

10/31/2006Assets

Current Assets CashInvestments in stocksAccounts receivableMerchandise inventorySuppliesTotal Current Assets

Fixed Assets ComputersLess: accumulated depreciationFurniture and fixturesLess: accumulated depreciationOffice equipmentLess: accumulated depreciationTotal Fixed AssetsTotal AssetsLiabilities and Shareholders' Equity

Current Liabilities Accounts payableSales tax payablePayroll tax payableTotal Current Liabilities

Long Term Liabilities Loan payableTotal LiabilitiesStockholders' EquityContributed capitalRetained earningsTotal Shareholders' EquityTotal Liabilities and Shareholders' Equity

Assets: property oreconomicresources ownedby a business.

Liabilities:amounts owed tocreditors.

Equity: the owners' claimsto or investment in theassets of the business.

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Business PlanRequirement; Income Statement

This is a rah-stepincorre statement.* In the first step, the

gross profit isprovided.* In the next step, the

total expenses areprovided.* In the next step, the

net inoorre (or netloss) is provided.

W dd Wide LampsIncome Staterrent

For the Month Ending 10/31/2006

Revenue

Cost of Goods SoldGross Profit

ExpensesSalarix 4000Rent 1800Advertising 5000Payrditax 306Insurance 100Utilities 250Interest 533.33applies 75Total 12064.x3

Net inoor e (loss) 1 (11,124.33)

SalesReturns 0Net Sales

156094I

Profit morn percentage =Gross profit/Total sales =

940/2500 = 37.6%

You Will need this ratio todetern i ne the break even pant

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Business Plan Requirement: Cash Flow StatementWorld Wide Lamps

Statement of Cash FlowsFor the Month Ending 10/31/2006

Cash balance at beginning of period:

Receipts of cash:

Sales

Payment of accounts receivable

Loan proceeds

Other

Total receipts:

Payments:

Cost of merchandise

Salaries

Accounts payable

Rent

Advertising/ promotion

Payroll tax

Insurance

Accounting and legal fees

Utilities

Interest

Pension, profit sharing or 401(k)

Sales tax

Other or miscellaneous

Corporate tax

Total payments:

Cash balance at end of period:

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Beginning bash balance

Plus cash increases

Minus cash payments

Equals ending cashbalance

Business PlanRequirement; Break-Even Analysis

Break-Even AnalysisMethod of calculating the minimum volume of sales needed at a given

price to cover all costs

The break-even point can be calculated in units..= fixed costs / selling price per unit — variable costs per unit

The break-even point can be calculated in dollars..= fixed costs / average profit percentage of each dollar of sales

Note: In VE, the cost of goods sold is the only variable cost. All other costs areconsidered fixed costs.

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Accounting Forms A vailable on the VEC Web Site

VIRTUAENTERPRI S

I NTERNATIONAL

Accounting Forms

Task Action

Enter amount received in the cash receipts andpayments journal. Update accounts receivablerecord if the cash receipt is for payment of a salemade on account.

Enter the amount paid in the cashreceiptsandpaymentsjournal. Update the accountspayablerecord if the cash payment is for a purchase madeon account.

Send a purchase order Do not record this event into the accounting records.

If you receive merchandise inventory, update theReceive what you ordered inventory control record. If you receive an asset,

update the asset log.

Enter the purchase in the purchases journal andupdate the accounts payablerecord.

www.veinternational.org Deloitte

Pay cash

Receive an invoice

Receive cash

The following guide contains all the forms necessary to complete your daily accountingtrans actions.

I If

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The VEC Bank enables you to pay the firm's utility bi ls, employeesalaries, and invoices as well as receive payment for goods andservices your firm provides to customers/clients,

• Payment of employee salaries and invoices from the firm'sbank account are the responsibility of your firm's Finance orAccounting Department,• When a client pays for goods or services provided to them,the money is paid to the firm's bank accountfrom the customer's/client's bank account,• The firm's Finance or Accounting Department should periodicallyreconcile information in the account details of the VEC Bankwith the firm's accounting records,

The VEC BANK can be accessed from the VE home page.Go to www.veinternational.orj', select Marketplace, then online banking.

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Accounting Records

Things to remember:

- Information on the VEC Bank statements provided on the websiteand in the accounting records must reconcile.

- Transactions for the summer months must be recorded in theaccounting worksheets,

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It E

BasicRequirements of an Annual Report

Board of Directorsand

Management

FinancialStatements and

Notes3

Letter toStockholders

andStockholder Info.

7

Management'sDiscussion

4

Numbers 1- 5 is required information by the SECumbers 6 — 8 is optional information a company can provide

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Elements of an Annual Report

■ Corporate Message - Typically covers the company's line of business,markets, mission, management philosophy, corporate culture, andstrategic direction.

■ Letter to Stockholders - Typically a letter written by the Chief ExecutiveOfficer, Chief Financial Officer, or Chairperson of the Board to thecompany's stockholders reflecting the business philosophy andmanagement style of the company's executives.

■ Selected Financial Data - Summarizes data illustrating a company'sfinancial condition over a five year period. Items highlighted may includeNet Income, Return on Sales, Net Sales, Working Capital, Current Ratio,and Quick Ratio.

■ Management's Discussion - A narrative in which managementdiscusses and analyzes the company's performance. This section for VEannual reports may also include biographies of the company'smanagement, job descriptions, organizational charts, and a description ofthe business.

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Elements of an Annual Report■ Report of Management- A letter from the Management of the firm, stating the

responsibilities and integrity of the consolidated financial information appearingin the annual report.

■ Independent Auditors' Report - A letter to the Board of Directors andstockholders of the company communicating the services provided by thecompany's independent auditors.

■ Financial Statements and Footnotes - Records that provide the raw numbersfor the company's financial performance and recent historical data. Thefootnotes provide detailed explanations of items in the financial statements.

■ Board of Directors and Management - Directory of the company's board ofdirectors and executive management and organization chart of who reports towhom.

■ Stockholder Information - Covers the basic stock information such as thecompany's investor relations contact information, ticker symbol, the exchangeson which the company's stock trades, the location and time of the next annualstockholder's meeting, etc.

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Audit Checklist

Virtual Enterprises, InternationalAudit Checklist

Spring 20061

Description Amount EvidenceCompany loan balanceoutstanding 5/0112005

Copy of promissory note

Company loan balanceoutstanding 4/30/2006 ,

D and VEC Bankfefere ce numbers for all

y ants made in fiscal'ye'~ r.

Cash balance in VEC Bankaccount as of 4130/2006

Har p. y,r~.tc..h.. rg.gi% rp etal .

Inventory, at cost, as of4/30/2006

Comp r.? inventory recordswith details subject toverification.

Total sales 5/01/2005 —4/30/2006.

Sales journal with any listedsale subject to verificationof information details.

Wholesale purchases5/01/2005 — 4/30/2006.

VEC Trading Companyinvoices.

Profit margin percentage. Self calculated: grossprofit/sales.

Total assets, at cost, as of4/30/2006

Invoices of purchases.

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Points to Remember...Accounting is a constant process throughout theyear!

■ Review the accounting journals early.

■ The VEC Bank is NOT the company's accountingrecords.

■ ASSETS =LIABILITIES 4- OWNERS EQUITY

■ The annual report is a story of your company'sperformance.

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Please record journal entries for the following transactions for World Wide Lamps ("WWL") using the accounting forms provided.

1. On 10/01, WWL receives $80,000, the proceeds of a start-up loan from VEC Bank.

2. On 10/2, WWL purchases computers for $35,000, office furniture for $35,000, and office equipment for $15,000. WWL sendsthe invoices to the VEC. The VEC will pay the invoices in exchange for the capital stock of WWL.

3. On 10/3, WWL purchases 100 deluxe lamps from VEC Trading, the wholesale company. WWL receives an invoice for $6,240(100 * $60 plus $240 freight).

4. On 10/4, WWL receives a purchase order from The Printing Depot to purchase 25 deluxe lamps for $100 per lamp, plusshipping, plus tax.

5. On 10/4, the sales manager prepares (and sends) an invoice for this sale: 25 * $100, plus shipping $75, plus sales tax $215.66,for a total of $2,790.66.

6. On 10/5, WWL pays the invoice from VEC Trading for $6,240.

7. On 10/6, WWL receives the $2,790.66 payment from The Printing Depot.

8. On 10/7, WWL pays $1,800 rent to VEC Realty.

9. On 10/7, WWL pays $250 for utilities to VEC Utilities.

10. On 10/10, WWL signed a $5,000 contract with the VE firm OVEA, hiring them to design ads that will run in an onlinemagazine. A deposit of $2,000 was paid at this time.

11. On 10/15, WWL sends a purchase order to Office Supplies Enterprise ordering $75 worth of supplies. The supplies and aninvoice are received the next day.

12. On 10/20, WWL received drafts of the ads and paid OVEA the balance owed, $3,000.

13. On 10/31, WWL made the 1st loan repayment to VEC Bank. The payment of $1,622.1 1 included $533.33 interest expense and$1,088.78 of principal repayment.

14. On 10/31, WWL calculates and pays the monthly payroll. The following information was found in the firm's payroll register:gross pay of $4,000, Social Security (employees' share) $248, Medicare (employees' share) $58, Federal Withholding Tax$600, net pay $3,094.

15. On 10/31 WWL prepares the payroll withholding form (941) and pays a total of $1,212 for October payroll taxes to VEC Tax.($600 Federal Withholding Tax; $306 employees' share of Social Security and Medicare; $306 employer's share of SocialSecurity and Medicare.)

CASH RECEIPTS, CASH PAYMENTS AND GENERAL JOURNAL

EXPLANATION

CASH CASH

REF. # DATE DESCRIPTION RECEIPT PAYMENT BALANCE

ACCOUNTS

RECEIVABLE

ACCOUNTSPAYABLE

PAYROLLWITH-

HOLDINGS

RENT &

UTILITIES SALARIES

► ► . ► ► e 4 ►

Accounts Payable Record

Vendor Name: VEC Trading

Accounts Payable Record

Vendor Name: Office Supplies Enterprise

DATE INVOICE #INVOICEAMOUNT AMOUNT PAID BALANCE DATE INVOICE #

INVOICEAMOUNT AMOUNT PAID BALANCE

1234

Accounts Payable Record Note Payable Record

Vendor Name: OVEA Creditor Name: VEC Bank Lending

DATE INVOICE #INVOICEAMOUNT AMOUNT PAID BALANCE DATE PRINCIPAL INTEREST PAYMENT BALANCE

1234

1234

Asset Log

NAME OF ASSETDATE PLACED

IN SERVICECOST OF

ASSETRECOVERY

PERIODMETHOD OF

DEPRECIATIONDEPRECIATION

DEDUCTIONACCUMULATEDDEPRECIATION SALE PRICE

computers 10/2/2006 $35,000 5 years straight line 00

00000

NAME OF ASSETDATE PLACED

IN SERVICECOST OF

ASSETRECOVERY

PERIODMETHOD OF

DEPRECIATIONDEPRECIATION

DEDUCTIONACCUMULATEDDEPRECIATION SALE PRICE

office furniture 10/2/2006 $35,000 5 years straight line 00000000

NAME OF ASSETDATE PLACED

IN SERVICECOST OF

ASSETRECOVERY

PERIODMETHOD OF

DEPRECIATIONDEPRECIATION

DEDUCTIONACCUMULATEDDEPRECIATION SALE PRICE

office equipment 10/2/2006 $15,000 5 years straight line 00000000

Purchases Journal

DATE DESCRIPTIONINVOICE # AMOUNTVENDOR

-A A

Item Name: Deluxe lampsItem #:

Description:

Preferred Inventory LevelMinimum:Maximum:

Purchased Sold Balance

Date UnitsUnitCost Total Units

UnitCost

Cost ofGoods Sold Units

UnitCost Total

0 0 0 00 0 0 00 0 0 00 0 0 00 0 0 00 0 0 00 0 0 00 0 0 00 0 0 00 0 0 00 0 0 00 0 0 00 0 0 00 0 0 00 0 0 00 0 0 00 0 0 00 0 0 00 0 0 00 0 0 00 0 0 00 0 0 0

Sales Journal

DATE CUSTOMER INVOICE #SALE

AMOUNT SALES TAX TOTAL

Accounts Receivable Record

Customer: The Printing Depot

DATE INVOICE #INVOICEAMOUNT AMOUNT PAID BALANCE

World Wide LampsLoan Amortization Table

PrincipalAnnual RateMonthly RateMonthsMonthly payment

$80,0008%

0.6666667% = 8% / 1260

$1, 622.11

Principal InterestTotal BalanceOutstanding Payment

Revised BalanceOutstanding

80,000.00 533.33 80,533.33 1,622.11 78,911.2278,911.22 526.07 79,437.30 1,622.11 77,815.1977,815.19 518.77 78,333.96 1,622.11 76,711.8576,711.85 511.41 77,223.26 1,622.11 75,601.1575,601.15 504.01 76,105.16 1,622.11 74,483.0574,483.05 496.55 74,979.60 1,622.11 73,357.4973,357.49 489.05 73,846.54 1,622.11 72,224.4372,224.43 481.50 72,705.93 1,622.11 71,083.8271,083.82 473.89 71,557.71 1,622.11 69,935.6069,935.60 466.24 70,401.84 1,622.11 68,779.7368,779.73 458.53 69,238.26 1,622.11 67,616.1567,616.15 450.77 68,066.92 1,622.11 66,444.8166,444.81 442.97 66,887.78 1,622.11 65,265.6765,265.67 435.10 65,700.77 1,622.11 64,078.6664,078.66 427.19 64,505.85 1,622.11 62,883.7462,883.74 419.22 63,302.97 1,622.11 61,680.86

CASH RECEIPTS, CASH PAYMENTS AND GENERAL JOURNAL

EXPLANATION

REF. # DATE DESCRIPTIONCASH

RECEIPTCASH

PAYMENT BALANCEACCOUNTSRECEIVABLE

ACCOUNTSPAYABLE

PAYROLLWITH-

HOLDINGSRENT &

UTILITIES SALARIES OTHER

1-Oct Loan 80,000.00 80,000.00 80,000.00

5-Oct NP 6,240.00 73,760.00 6,240.006-Oct AIR 2,790.66 76,550.66 2,790.667-Oct Rent 1,800.00 74,750.66 1,800.00

7-Oct Utilites 250.00 74,500.66 250.00

10-Oct AD Deposit 2,000.00 72,500.66 2,000.0020-Oct NP 3,000.00 69,500.66 3,000.0031-Oct Loan Payble 1,622.11 67,878.55 1,622.11

31-Oct Salaries 3,094.00 64,784.55 3,094.00

31-Oct Payroll Tax 1,212.00 63,572.55 1,212.00

Vendor Name: Vendor Name:

Accounts Payable Record

VEC Trading

Accounts Payable Record

Office Supplies Enterprise

DATE INVOICE #INVOICEAMOUNT AMOUNT PAID BALANCE

3-Oct 6,240.00 6,240.005-Oct 6,240.00 0.00

DATE INVOICE #INVOICEAMOUNT AMOUNT PAID BALANCE

15-Oct 75.00 75.001234

Vendor Name:

Accounts Payable Record

OVEA Creditor Name:

Note Payable Record

VEC Bank Lending

DATE INVOICE #INVOICEAMOUNT AMOUNT PAID BALANCE

10-Oct 5,000.00 2,000.00 3,000.0020-Oct 3,000.00 0.00

DATE PRINCIPAL INTEREST PAYMENT BALANCE1-Oct 80,000.00 533.33 80,533.33

31-Oct 1,622.11 78,911.221-Nov 78,911.22 526.07

1234

Asset Log

NAME OF ASSETDATE PLACED

IN SERVICECOST OF

ASSETRECOVERY

PERIODMETHOD OF

DEPRECIATIONDEPRECIATION

DEDUCTIONACCUMULATEDDEPRECIATION SALE PRICE

computers 10/2/2006 $35,000 5 years straight line 583.33 583.33 34,416.67

NAME OF ASSETDATE PLACED

IN SERVICECOST OF

ASSETRECOVERY

PERIODMETHOD OF

DEPRECIATIONDEPRECIATION

DEDUCTIONACCUMULATEDDEPRECIATION SALE PRICE

office furniture 10/2/2006 $35,000 5 years straight line 583.33 583.33 34,416.67

NAME OF ASSETDATE PLACED

IN SERVICECOST OF

ASSETRECOVERY

PERIODMETHOD OF

DEPRECIATIONDEPRECIATION

DEDUCTIONACCUMULATEDDEPRECIATION SALE PRICE

office equipment 10/2/2006 $15,000 5 years straight line 250.00 250.00 14,750.00

Purchases Journal

DATE VENDOR INVOICE # DESCRIPTION AMOUNT F reight Total3-Oct

15-Oct Office Supplies EnterpriseVEC Trading

Office SuppliesDeluxe Lamps 6,000.00

75.00240.00 6,240.00

75.00

Item Name: Deluxe lampsItem #:

Description:

Preferred Inventory LevelMinimum:Maximum:

Purchased Sold Balance

Date UnitsUnitCost Total Units

UnitCost

Cost ofGoods Sold Units

UnitCost Total

3-Oct 100 60 6,000 0 100 6,0004-Oct 0 25 100 2,500 75 3,500

0 0 75 3,5000 0 75 3,5000 0 75 3,5000 0 75 3,5000 0 75 3,5000 0 75 3,5000 0 75 3,5000 0 75 3,5000 0 75 3,5000 0 75 3,5000 0 75 3,500

Sales Journal

DATE CUSTOMER INVOICE #SALE

AMOUNT Shipping SALES TAX TOTAL4-Oct Printing Depot 2,500.00 75.00 215.66 2,790.66

Accounts Receivable RecordCustomer: The Printing Depot

DATE INVOICE #INVOICEAMOUNT AMOUNT PAID BALANCE

4-Oct 2,790.66 2,790.666-Oct 2,790.66 0.00

World Wide LampsLoan Amortization Table

PrincipalAnnual RateMonthly RateMonthsMonthly payment

$80,0008%

0.6666667% = 8% / 1260

$1,622.11

Principal InterestTotal BalanceOutstanding Payment

Revised BalanceOutstanding

80,000.00 533.33 80,533.33 1,622.11 78,911.2278,911.22 526.07 79,437.30 1,622.11 77,815.1977,815.19 518.77 78,333.96 1,622.11 76,711.8576,711.85 511.41 77,223.26 1,622.11 75,601.1575,601.15 504.01 76,105.16 1,622.11 74,483.0574,483.05 496.55 74,979.60 1,622.11 73,357.4973,357.49 489.05 73,846.54 1,622.11 72,224.4372,224.43 481.50 72,705.93 1,622.11 71,083.8271,083.82 473.89 71,557.71 1,622.11 69,935.6069,935.60 466.24 70,401.84 1,622.11 68,779.7368,779.73 458.53 69,238.26 1,622.11 67,616.1567,616.15 450.77 68,066.92 1,622.11 66,444.8166,444.81 442.97 66,887.78 1,622.11 65,265.6765,265.67 435.10 65,700.77 1,622.11 64,078.6664,078.66 427.19 64,505.85 1,622.11 62,883.7462,883.74 419.22 63,302.97 1,622.11 61,680.86

World Wide Lamps Balance Sheet10/31 /2006

World Wide LampsBalance Sheet

10/31/2006

Current AssetsAssets

Cash 63572.55Accounts receivableMerchandise inventory 4680SuppliesTotal Current Assets 68252.55

Fixed Assets Computers 35000Less: accumulated depreciationFurniture and fixtures 35000Less: accumulated depreciationOffice equipment 15000Less: accumulated depreciationTotal Fixed Assets 85000Total Assets

Current LiabilitiesLiabilities and Shareholders' EquityAccounts payable 75Sales tax payable 215.66Payroll tax payableTotal Current Liabilities 290.66

Long Term Liabilities Loan payable 78911.22Total Liabilities 79201.88Stockholders' EquityContributed capital 85000Retained earnings -10949.33Total Shareholders' Equity 74050.67Total Liabilities and Shareholders' Equity 153252.55

World Wide Lamps Income StatementFor the Month Ending 10/31/2006

World Wide LampsIncome Statement

For the Month Ending 10/31/2006

RevenueSales 2575Returns 0Net SalesCost of Goods Sold I 1560Gross Profit I 1015

ExpensesSalaries 4000Rent 1800Advertising 5000Payroll tax 306Utilities 250Interest 533.33Supplies 75Total 11964.33

Net income (loss) I (10,949.33)

Profit margin percentage =Gross profit/Total sales =

1015/2575 = 39%

World Wide Lamps Statement of Cash FlowsFor the Month Ending 10/31/2006

World Wide LampsStatement of Cash Flows

For the Month Ending 10/31/2006

Cash balance at beginning of period: 0

Receipts of cash:

Sales 2575

Payment of accounts receivable

Loan proceeds 80000

Other 215.66

Total receipts: 82790.66

Payments:

Cost of merchandise 6240

Salaries 3094

Accounts payable

Rent 1 800

Advertising/ promotion 5000

Payroll tax 1 212

Utilities 250

Interest 533.33

Pension, profit sharing or 401 (k)

Sales tax

Other or miscellaneous 1 088.78

Total payments: 1 9218.11

Cash balance at end of period: 63572.55