Finance - Balance Sheets (Part 1) GCSE Business Finance - Balance Sheets (Part 1)

Learning Objective To understand what a balance sheet is.

Qs What are liabilities Balance Sheet The balance sheet is a record of a business assets and liabilities. Like a P/L account it is a record of what has happened. Qs What are assets? Qs What are liabilities Assets These are what the business owns Liabilities This is what the business owes.

The Balance Sheet There are 2 parts to a balance sheet: The Top Half This shows what the business has done with its money. It is called NET ASSETS. (This is what the business is worth) The Bottom Half This shows where all the money that the business has used came from. It usually comes from shareholders, retained profit and loans. It is often called CAPITAL EMPLOYED.

The bottom part looks at …   £ Fixed Assets Premises  60,000 Equipment  14,000 Current Assets Stocks 2,000 Debtors 5,000 Cash at Bank Current Liabilities Overdraft 3,000 Creditors Working Capital Net Assets Financed by: Owners Capital 40,000 Long Term Liability (Loan) Capital Employed The top part looks at … Net Assets The bottom part looks at … Capital Employed

What do these key terms mean? Key Words Fixed assets (tangible and intangible assets) Current assets Current liabilities Long term liabilities Net Assets Capital Employed What do these key terms mean? We also need to know what the phrase working capital means.

Fixed Assets Current Assets Current Liabilities Long Term Liabilities Net Assets Capital Employed

This is the long term and permanent capital of the business. These are assets that are owned by a business which it uses over a long period of time (such as buildings and machinery). It can include assets that are tangible and intangible assets. What's the difference? This is money that the business owes and will have to pay in more than 12 months time. This can includes long-term loans and mortgages. This is the long term and permanent capital of the business. It is calculated using the formula: Shareholders funds/Profit + Long Term Liabilities In finance what does the word capital mean? This is money that the business owes that it has to pay back within the next 12 months. For most businesses the most important liability is the money it owes to its. What does the word creditor mean? This shows a business the value of all the assets it owns. fixed capital + working capital Can you find out what working capital means? These are the assets that the business that can easily turn into cash (it can also include cash in the bank). Examples include stocks and any money owed to the business (debtors).

Other Key Features: Working Capital Working capital pays the day to day running expenses. It is what the business owns which is either cash or can be turned into cash. It is calculated using the following sum: Current assets MINUS Current Liabilities

Net Assets Employed = Capital Employed On the balance sheet: Net Assets Employed = Capital Employed The top and the bottom must be equal … why? Fixed Assets + Working Capital (CA – CL) Shareholders Funds + Retained Profit Long Term Loans

This the top part of the BS sheet Balance Sheet For Morgan’s Ladders 31st March 2012 £000 £000 Fixed Assets Premises 80 Machinery 40 Vehicles 30 Current Assets Stock 5 Debtors 12 Cash 3 Current Liabilities Creditors 15 Working Capital Net Assets Employed Add up Fixed Assets 150 Add up Current Assets Working Capital = Current Assets – Current Liabilities 20 Fixed Assets + Working Capital 5 155

This is the 2nd part of the Balance sheet Financed By: £000 £000 Share Capital 90 Retained Profit 35 Long Term Liabilities Bank Loan 30 130 Add all these figures together Capital Employed 155

Lets complete a balance sheet   £ Fixed Assets Premises  60,000 Equipment  14,000 Current Assets Stocks 2,000 Debtors 5,000 Cash at Bank Current Liabilities Overdraft 3,000 Creditors Working Capital Net Assets Financed by: Owners Capital 40,000 Long Term Liability (Loan) Capital Employed Lets complete a balance sheet

Long Term Liability (Loan)   £ Fixed Assets Premises  60,000 Equipment  14,000 Current Assets Stocks 2,000 Debtors 5,000 Cash at Bank Current Liabilities Overdraft 3,000 Creditors Working Capital Net Assets Financed by: Owners Capital 40,000 Long Term Liability (Loan) Capital Employed Example 2

Long Term Liability (Loan)   £ Fixed Assets Premises  60,000 Equipment  14,000 74,000 Current Assets Stocks 2,000 Debtors 5,000 Cash at Bank  12,000 Current Liabilities Overdraft 3,000 Creditors 6,000  Working Capital 6,000 Net Assets  80,000 Financed by: Owners Capital 40,000 Long Term Liability (Loan) Capital Employed 80,000

What is a ratio? A number representing a comparison between two things Ratio’s What is a ratio? A number representing a comparison between two things

Current Ratio’s Another way to find out whether there is enough working capital is using a CURRENT RATIO This is calculated using the following sum: Current Ratio = Current Assets Current Liabilities

Working Capital Good Working Capital Survive Cope in a crisis Bad Working Capital Can’t pay day to day expenses financial difficulties

What's the Difference The higher the ratio of current assets to current liabilities the higher the amount of working capital there is. The lower the ratio of current assets to current liabilities the lower the amount of working capital there is.

Qs What does it tell you about the businesses working capital? Activity Qs Calculate the working capital again using using the current ratio method. Qs What does it tell you about the businesses working capital?

The Acid Test Ratio Stock is part of working capital. However it might be difficult to sell stock quickly if it needed the cash. So business use the acid ratio test.

Ratio Acid Test ratio = Current Assets - Stock Current Liabilities

Qs Calculate the Ratio for Smith’s Business What does it mean? The higher the ratio the safer the business is. Qs Calculate the Ratio for Smith’s Business