GCSE Business Finance - Balance Sheets (Part 1)

Learning Objective To understand what a balance sheet is.

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.

££ Fixed Assets Premises 60,000 Equipment 14,000 Current Assets Stocks2,000 Debtors5,000 Cash at Bank5,000 Current Liabilities Overdraft3,000 Creditors3,000 Working Capital Net Assets Financed by: Owners Capital 40,000 Long Term Liability (Loan) 40,000 Capital Employed The top part looks at … Net Assets The bottom part looks at … Capital Employed

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 AssetsCurrent AssetsCurrent Liabilities Long Term LiabilitiesNet AssetsCapital Employed

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. It is calculated using the formula: 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

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

Balance Sheet For Morgan ’ s Ladders 31 st March 2012£000 Fixed Assets Premises80 Machinery40 Vehicles30 Current Assets Stock5 Debtors12 Cash3 Current Liabilities Creditors15 Working Capital Net Assets Employed Add up Fixed Assets Add up Current Assets Working Capital = Current Assets – Current Liabilities Fixed Assets + Working Capital This the top part of the BS sheet

Financed By:£000 Share Capital90 Retained Profit35 Long Term Liabilities Bank Loan30 Add all these figures together Capital Employed This is the 2 nd part of the Balance sheet

££ Fixed Assets Premises 60,000 Equipment 14,000 Current Assets Stocks2,000 Debtors5,000 Cash at Bank5,000 Current Liabilities Overdraft3,000 Creditors3,000 Working Capital Net Assets Financed by: Owners Capital 40,000 Long Term Liability (Loan)40,000 Capital Employed Lets complete a balance sheet

££ Fixed Assets Premises 60,000 Equipment 14,000 Current Assets Stocks2,000 Debtors5,000 Cash at Bank5,000 Current Liabilities Overdraft3,000 Creditors3,000 Working Capital Net Assets Financed by: Owners Capital 40,000 Long Term Liability (Loan)40,000 Capital Employed Exampl e 2

££ Fixed Assets Premises 60,000 Equipment 14,000 74,000 Current Assets Stocks2,000 Debtors5,000 Cash at Bank5,000 12,000 Current Liabilities Overdraft3,000 Creditors3,000 6,000 Working Capital6,000 Net Assets 80,000 Financed by: Owners Capital 40,000 Long Term Liability (Loan) 40,000 Capital Employed 80,000

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.

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

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