Measuring and Reporting

Financial Position
(the Balance Sheet)
Todays question
How do we measure the financial position
of a company?

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What do we control (assets)
and how was it financed (liabilities, equity)?
XXX Ltd
Balance Sheet at 30 June 2015
(in 000 dollars)

Current Liabilities
Current Assets NonCurrent Liabilities
Equity

Non-Current Assets Total Liabilities and Equity

Total Assets
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Revision True or False
The fundamental element equity does not
require recognition criteria, because it
represents the residual interest in assets,
after deducting liabilities. True
Why?
- IFRS define equity as a residual
 Topic objectives

On the completion of this weeks topic you should be able to:

Define a balance sheet
Describe the various formats of a balance sheet
Explain the accounting equation
Prepare a simple balance sheet using a worksheet
Includes learning many new key terms (account names)
Describe the advantages and limitations of a balance sheet
Explain the accounting for prepayments, retained profits
Basic interpretation of a balance sheet

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 Balance sheet in-class problem

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Example: Yipus Chocolate Shop
Yipu decided to start a shop
selling chocolates. The following
are the transactions of Yipus
chocolate shop for June 2014.

a. Yipu invested $30,000 to open a chocolate shop.

b. Purchased a car for cash $28,000.
c. Borrowed $5,000 from his mother and promised to
pay off the debt within one year.
d. Purchased inventory (chocolate) for $4,000 cash.
e. Repaid his mother $1,000.

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 Example: Yipus Chocolate Shop

Required:
Record the business transactions for
Yipus chocolate shop in the following
worksheet.

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 Yipus Chocolate Shop work sheet
Assets = Liabilities + Equity
Cash + Inventory + Car = Borrowings + Capital
a +30 000 = +30 000
b - 28 000 +28 000 =
c +5 000 = +5 000
d - 4 000 +4 000 =
e - 1 000 = - 1 000
Bal. 2 000 4 000 + 28 000 = 4 000 + 30 000

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Required:
Summarise the financial position as at
30 June, 2014.
(hint use a balance sheet)

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 Yipu
Balance Sheet at 30 June 2014
$

Current Assets
Cash 2 000
Inventory 4 000 6 000
Non-Current Assets
Vehicle 28 000 28 000
Total Assets 34 000
Less
Current Liabilities
Borrowings 4 000 4 000
Non-current Liabilities 0
Total Liabilities 4 000
Net assets 30 000
Equity 30 000

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Benefits of a balance sheet
Yipu example what does the balance
sheet tell us?

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 Yipu example what does balance
sheet tell
Net assets us?
of $34 000 Financial position
Mainly financed by business owner (30/34 = 88%)
Low debt, only a little help

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Using the balance sheet
Business assets and how financed.
Is the entity financially sound?
Amount of debt, debt/liabilities, debt/assets
Can the entity pay bills on time?
Working capital CA-CL, CA/CL
Can the directors declare a dividend?
Net equity (e.g. of partners but not market value of shares)
Equity, shares outstanding (e.g. South Sea bubble companies 1720)
Did the directors remove all assets from the business since last year?

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 Limitations of a balance sheet
It is only concerned with one point of time
It only provides past information
Limitations from value assumptions:
the monetary unit assumption
mixed model but mainly historical cost
assumption
Accounting principles and rules allow
accountants considerable discretion when it
comes to deciding how to record transactions

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Prepayments (page 56)
Prepayments are amounts paid in advance for which the
benefit is yet to be received
Prepayments are assets as entitled to a service or your
money back.
E.g. Paid cash for insurance
Reduce asset Cash; Increase asset Prepaid Insurance
When paid, reduce asset cash; Increase asset Prepaid Insurance
Later: reduce Prepaid Insurance, increase Insurance expense

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Equity - Retained Profits (p 66-67)
Beginning retained profits (on beginning of period balance
sheet)

+ Profits this period (or Losses this period)

- Dividends this period (and distributions)
= Ending retained profits (on end of period balance sheet)

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Real example:
Toll Holdings Limited Annual Report
30 December 2014
http://www.tollgroup.com/annual-reports
Select 2014 annual report, page 76 (pdf 78)

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Some Items on Toll balance sheet:
Equity:
Contributed equity (Issued capital - shares)
Retained earnings/equity (Retained profits)
Treasury shares (Toll owns some Toll shares)
Reserves (Allocation of Retained profits)

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Some Items on Toll Balance Sheet
Intangible assets
Refer note 18
Capitalised software development costs
Goodwill (from purchasing companies)
Customer contracts (unusual, purchased these?)

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Book value versus market value

Total assets $B 5.901

Net assets $B 2.733
So why is the takeover bid $B 6.5?
Book value versus market value - What is the
difference? What is the accounting missing?
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Book value versus market value
Goodwill = MV NBV (by definition) represents:
BV: Cost (net of depreciation)
MV: includes value of expected future growth, Potential
BV: Cost of assets in place
MV: Value of future cash flows from assets in place
BV: More reliable (verifiable)
MV: Based on expectations

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Next Class
Measuring financial performance
Chapter 2 +
Reading chapter 3 completed

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