Chapter 5.

24
Balance Sheets
(and a bit of account analysis)
 Activity 24.1
Company Vehicles Non-current Assets (aka Balance
Cash in the till Current Assets

Ten-Year bank loan Non-Current Liabilities Sheet Quiz)

Money owed by customers Current Assets
Complete the table
Unsold goods Current Assets
You have approximately 10 minutes
Factory Building Non-current Assets

Retained Profit Reserves

Amounts owed to suppliers Current Liabilities

Tax owed to the government Current Liabilities

 Balance Sheet
What a
Company is
worth

A balance sheet is a financial statement that summarizes a company's assets, liabilities and shareholders' equity
at a specific point in time. These three balance sheet segments give investors an idea
as to what the company owns and owes, as well as the amount invested by shareholders.
Difference between balance sheet and
Income statement
Income statement covers a period of time
Balance sheet is a snap shot of a moment in time
Current assets - are balance sheet accounts
that represent
Assets Non-current assets -
the value of all assets that can
reasonably expected to be converted are company's long-term investments
into cash within one year. in the case that the
full value will
not be realized within
the accounting year
Most depreciate
over time

An asset is a resource with economic value that an individual, corporation or country

owns or controls with the expectation that it will provide future benefit
Current liabilities - A company's debts or
obligations
Liabilities
whose FULL VALUE are due within one year.
Non-current liabilities - are a business's
long-term financial
obligations whose FULL VALUE
are not due within one year.
.

A liability is a company's legal debt or obligation

that arise during the course of business operations
 Shareholders (Owners)
Equity
The owners equity is simply the owners
share of the assets of a business.
Assets - Liabilities
Shareholders' equity comes from two main sources. The first and original source is the money that was
originally invested in the
company, along with any additional investments made thereafter.
The second comes from retained earnings which the company
is able to accumulate over time through its operations.
Explanation of balance sheet terms
Total assets less total liabilities is always equal to total shareholders
funds or equity or else the balance sheet would not balance
Shareholders equity or shareholders funds is the total sum of money
invested into a company by the owners (shareholders)
Ways money is invested:
Share capital money put in when owners bought shares (newly
issued)
Reserves arise from retained profit from current and previous years.
(Owned by shareholders but not paid out in dividends)
Interpreting balance sheet data
Shareholders can see if their value has risen or fallen in the last year
Can check how an increase in non-current assets has been financed
Calculate working capital (make sure its healthy
Calculate capital employed
Can use for ratios as well
 Assets
Noncurrent fixed assets __________
Land and buildings __________
Machinery __________
Vehicles __________
Current assets __________
Inventories (stocks) __________
Accounts receivable (debtors __________
Cash __________
Total Assets __________
Liabilities
Current Liabilities __________
Accounts payable (creditors __________
Bank overdrafts __________
Non current (long-term liabilities) __________
Long-term-loans __________
Total liabilities __________
Total assets total liabilities __________
Shareholders equity
Share capital __________
Profit and loss account reserves __________
Total shareholders funds/equity __________
 Assets
Noncurrent fixed assets 1150
Land and buildings __________
Machinery 400
Vehicles 300
Current assets __________
Inventories (stocks) 80
Accounts receivable (debtors 50
Cash 10
Total Assets __________
Liabilities
Current Liabilities 130
Accounts payable (creditors __________
Bank overdrafts 65
Non current (long-term liabilities) __________
Long-term-loans 300
Total liabilities __________
Total assets total liabilities __________
Shareholders equity
Share capital 520
Profit and loss account reserves 340
Total shareholders funds/equity __________
 Assets
Noncurrent fixed assets 1150
Land and buildings 450
Machinery 400
Vehicles 300
Current assets 140
Inventories (stocks) 80
Accounts receivable (debtors 50
Cash 10
Total Assets 1290
Liabilities
Current Liabilities 130
Accounts payable (creditors 65
Bank overdrafts 65
Non current (long-term liabilities) 300
Long-term-loans 300
Total liabilities 430
Total assets total liabilities 860
Shareholders equity
Share capital 520
Profit and loss account reserves 340
Total shareholders funds/equity 860
 Assets
Bank overdrafts __________
Land and buildings __________
Total assets total liabilities __________
Total shareholders funds/equity __________
Vehicles __________
Current assets __________
Liabilities
Accounts payable (creditors __________
Non current (long-term liabilities) __________
Long-term-loans __________
Noncurrent fixed assets __________
Total liabilities __________
Accounts receivable (debtors __________
Shareholders equity
Current Liabilities __________
Inventories (stocks) __________
Cash __________
Share capital __________
Machinery __________
Profit and loss account reserves __________
Total Assets __________
 Assets
Noncurrent fixed assets __________
Land and buildings __________
Machinery __________
Vehicles __________
Current assets __________
Inventories (stocks) __________
Accounts receivable (debtors __________
Cash __________
Total Assets __________
Liabilities
Current Liabilities __________
Accounts payable (creditors __________
Bank overdrafts __________
Non current (long-term liabilities) __________
Long-term-loans __________
Total liabilities __________
Total assets total liabilities __________
Shareholders equity
Share capital __________
Profit and loss account reserves __________
Total shareholders funds/equity __________
 Total assets total liabilities 820
Assets
Long-term-loans __________
Accounts payable (creditors __________
Machinery 350
Current assets __________
Cash 15
Liabilities
Current Liabilities 100
Noncurrent fixed assets __________
Non current (long-term liabilities) 245
Land and buildings 440
Inventories (stocks) 50
Shareholders equity
Share capital 500
Accounts receivable (debtors __________
Profit and loss account reserves 320
Total Assets 1165
Vehicles 250
Total shareholders funds/equity __________
Bank overdrafts 60
Total liabilities 345
 Assets
Noncurrent fixed assets 1040
Land and buildings 440
Machinery 350
Vehicles 250
Current assets 125
Inventories (stocks) 50
Accounts receivable (debtors 60
Cash 15
Total Assets 1165
Liabilities
Current Liabilities 100
Accounts payable (creditors 40
Bank overdrafts 60
Non current (long-term liabilities) 245
Long-term-loans 245
Total liabilities 345
Total assets total liabilities 820
Shareholders equity
Share capital 500
Profit and loss account reserves 320
Total shareholders funds/equity 820
 Analysis of Accounts
Using the data contained in the accounts
to make useful observations about the performance
And financial strength of a business
 We can use the analysis to determine if a business is
Doing better historically
Doing better than other companies
 Measuring Profitability
Gross Profit Gross Profit
Sales Revenue
Margin
Net Profit Margin Net Profit
Sales Revenue

Net Profit
Return on Capital Capital Employed

Capital Employed = Owners Equity + Non-Current Liabilities

Using your hand-outs produce the following:
Darrens Ice Cream Company #2
Return on Capital 37.56% (Before Tax)
Net Profit 22.54% (After Tax)
Capital Employed

53.85%
Gross Profit Margin
Gross Profit
Sales Revenue

Net Profit Margin 15.38% (Before Tax)

Net Profit 9.23% (After Tax)
Sales Revenue

Capital Employed = Owners Equity + Non-Current Liabilities

 Liquidity
describes the degree to which an asset can be quickly bought
or sold in the market without affecting the asset's price

When we measure liquidity with respect to a business, we measure the ability of

a business to pay its short-term debts.

Accounting liquidity measures the ease with which an individual or

company can meet their financial obligations with the liquid assets available to them.
 Measuring Liquidity
Current Ratio Current Assets
Current Liabilities

Current Assets - Inventories

Acid Test Ratio Current Liabilities
 Using your hand-outs produce the following:

Company #1 Company #2

4.79 11.07
Current Ratio
Current Assets
Current Liabilities

8.92
Acid Test Ratio 2.48
Current Assets - Inventories
Current Liabilities
Users of accounts
Managers will have the most detailed and frequent numbers
Watch performance of a product or division
Help with decision making
Can do comparisons (historic or other bus) better
Users of accounts
Shareholders (limited companies) legal right to receive published
accounts
Want to know how much profit was made (income statement)(is it
improving?)
Want to know if the company is worth more (balance sheet)
Want to know liquidity position before investing
Users of accounts
Creditors use accounts to figure out if they should give credit
Can learn the value of their debt (balance sheet)
Liquidity ratios can show the likelihood of being paid back
Users of accounts
Bank
Will not give loans or charge higher rates of interest
Users of accounts
Govt
Make sure they pay their taxes
Could mean unemployment if negative
Users of accounts
Workers and trade unions
is the future secure or not
If the company is making a profit ask for a raise
Users of accounts
Other businesses (same industry)
Takeover targets
Compare profitability
Limitations of using accounts and ratio
analysis
Managers have all data but external stakeholders can only use the
ones required
Use past data
Inflation and other factors can make numbers misleading
Different accounting practices by firms (fixed
assets(tangible/intangible)
 Prepare Yourself

Please clear your desk except for a pen.

 Quiz Answers
Non-Current Asset Items owned by the business that will not reasonably be expected to be converted into
cash within 1 year.

Current Liability Debts owed by the business payable within 1 year

Liquidity - describes the degree to which an asset can be quickly bought

or sold in the market without affecting the asset's price

Acid Test Ratio = Current Assets - Inventories

Current Liabilities

Gross Profit Margin = Gross Profit

Sales Revenue

Return on Capital Employed = Net Profit

Capital Employed

(Capital Employed = Shareholders Equity + Non-Current Liabilities)

 Quiz
Non-Current Asset

Current Liability

Liquidity

Acid Test Ratio =

Gross Profit Margin =

Return on Capital Employed =

(Capital Employed =)
 Gearing (leveraging)
The level of a companys debt related to its equity capital, usually
expressed in percentage form. Gearing is a measure of a companys
financial leverage and shows the extent to which its operations are funded
by lenders versus shareholders.
 Gearing Ratio (Leveraging)

Non-current Liabilities
Capital Employed

Capital Employed = Shareholders Equity + Non-Current Liabilities

 Gearing (leveraging)
The higher a company's degree of leverage, the more the company is
considered risky. As for most ratios, an acceptable level is determined by
its comparison to ratios of companies in the same industry.
Income Statement

C. Sales Revenue

D. Cost of Goods Sold

G. Rent Expense

J. Gross Profit

L. Net Profit

N. Utility Expense

Q. Repair Expense

S. Office Expense
 Balance Sheet

Current Assets
Current Liabilities
A. Accounts Receivable
B. Accounts Payable
P. Cash
O. Bank Overdraft
R. Inventories

Non-Current Liabilities

Non- Current Assets H. 10 Year Bank Loan

F. Buildings
Shareholders Equity
I. Computer Equipment
E. Share Capital
K. Office Furnishings
M. Retained Earnings
 Schedule

Tuesday April 19 Jeopardy

(Unit 5 Financial Information)

Friday - April 22 Test

(Unit 5 Financial Information)