The Balance Sheet.

Slides:



Advertisements
Similar presentations
1 Financial Statements Three basic statements: Balance sheet Balance sheet Income statement Income statement Statement of cash flows Statement of cash.
Advertisements

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved CHAPTER 2 Financial Statements and Cash Flow.
Chapter 2 - Understanding Financial Statements, Taxes, and Cash Flows  2005, Pearson Prentice Hall.
FINANCIAL ACCOUNTING ACTG 3000 Presented by Charles Kile, Ph.D. Professor of Accounting Middle Tennessee State University.
The Balance Sheet Lecture 2 This lecture is part of Chapter 1: The Basic Financial Statements.
How to read a FINANCIAL REPORT
Understanding and Managing Finance This Presentation is in Self-Study Form To start the presentation: Press F5 (Top Row of Keyboard) Then use the navigation.
© 1999 by Robert F. Halsey In this chapter, we will cover the four financial statements that are provided by companies to shareholders and other interested.
DES Chapter 3 1 Financial Statements and Free Cash Flow.
Chapter 3.
Financial Statements, Cash Flows, and Taxes
FINANCIAL STATEMENTS.
IGCSE BUSINESS STUDIES
Ch. 2 Financial statement, Taxes and Cash flows. 1. Balance sheet Summarizing what a firm owns (assets) and what a firm owes (liabilities) Asset = Liability.
Financial Ratios Lecture 6
McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter 1717 Understanding Financial Information.
The Cash Flow Statement Lecture 3 This lecture is part of Chapter 1: The Basic Financial Statements.
Computer and Financial Analysis
1 The Balance Sheet. 2 As we think about our financial goals, we may want to make plans so we can get where we want to go. A useful tool in this process.
0 Accounting Statements and Cash Flow. 1 Chapter Outline 2.1 The Balance Sheet 2.2 The Income Statement 2.3 Net Working Capital 2.4 Financial Cash Flow.
Overview of Finance. Financial Management n The maintenance and creation of economic value or wealth.
Nursery Management Understanding and Managing Finance Session 2.
The balance sheet Fred Wenstøp. 2 Assets Things owned by the business 100 Liabilities Amounts owed by the business 100 Assets Where money is spent 100.
2-0 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Financial Statements and Cash Flow Chapter 2.
Financial Statements and Cash Flow Analysis. 2 Financial Statements Financial statements provide information about the financial activities and position.
Section 36.2 Financial Aspects of a Business Plan
Financial Statements: The Balance Sheet
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Basic Accounting Concepts: The Balance Sheet © The McGraw-Hill Companies, Inc., Part One:
ANALYSIS OF FINANCIAL STATEMENTS Using Ratios Presented by the Arkansas Securities Department.
BASIC TERMINOLIGIES USED IN FINANCIAL ACCOUNTING BY: WAQAR AHMAD LECTURER MANAGEMENT SCIENCE DEPARTMENT RANA UNIVERSITY KABUL, AFGHANISTAN.
Chapter 2 - Understanding Financial Statements, Taxes, and Cash Flows 09/02/08.
GEK Compound & Prosper GEK2507 Frederick H. Willeboordse
Copyright © 2006 McGraw Hill Ryerson Limited3-1 prepared by: Sujata Madan McGill University Fundamentals of Corporate Finance Third Canadian Edition.
Classified Balance Sheet Data grouped according to major categories Makes it easier to analyze the information on the balance sheet.
FINANCIAL STATEMENTS AND CASH FLOW ANALYSIS CHAPTER 24.
GEM A Finance Survival Kit GEM2508 Frederick H. Willeboordse
GEK Compound & Prosper GEK2507 Frederick H. Willeboordse
ACCOUNTING BASIC TERMS. ASSETS These are economic resources of an enterprise that can be usefully expressed in monetary terms. Assets are things of value.
Balance sheet Business Studies.
Balance Sheet A balance sheet is one of the three annual financial statements that companies are legally required to produce for auditing purposes. It.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Chapter 17 Understanding Corporate.
UNIT C ECONOMIC FOUNDATIONS AND FINANCING 6.01 Compare records used in business.
money you have in a bank either in checking (where you can use the money with an ATM card or by writing a check) or savings (where you earn interest)
DES Chapter 3 1 DES Chapter 3 Financial Statements and Free Cash Flow.
How can I make a profit and still run out of cash? Review Financial Statements Cash Flow and Working Capital.
BusinessAllstars.com1 Basic Accounting Copyright © 2007 by WACGA All right reserved This material may not be used or reproduced without permission of the.
McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter 1717 Understanding Financial Information.
Financial Statement Basics BDI3C. Major Financial Statements  Balance Sheet Individual: Net Worth Statement  Income Statement  Cashflow Statement.
Financial Statements and Free Cash Flow 1. Cash is King! Investors care about cash flow. It is worth going to a lot of trouble to disentangle cash flow.
McGraw-Hill/Irwin Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved. 2-0 CHAPTER 2 Accounting Statements and Cash Flow.
Valuation Part 1 Presented by: Elson ong Yale-NUS Investment Masterminds 1) Several Key Financial Metrics 2) How to Identify Them in An Annual Report.
Ch. 3 Financial Statements, Cash Flows and Taxes.
The Balance Sheet. What is a Balance Sheet? A financial statement that shows the company’s assets, liabilities, and net worth (also known as equity) on.
Robert N. West © VEMBA Accounting Basic Accounting Concepts: The Balance Sheet © The McGraw-Hill Companies, Inc., Part One: Financial Accounting.
Financial Statements, Forecasts, and Planning
Chapter 3 - The Balance Sheet  The balance sheet provides a snapshot of the firm’s financial position on a specific date. It is defined by: Total Assets.
Finance Chapter 2 Financial statements. Financial statements & reports  Annual report—a report issued once a year by a corporation to its stockholders,
We will learn today: What a Balance Sheet is How to define Assets and Liabilities How to Make it BALANCE !
Business & Corporate Management II Finance Basics.
Financial Statements Filippo Egizii UNIDO ITPO Bahrain
McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. 2-0 Corporate Finance Ross  Westerfield  Jaffe Seventh Edition.
One of the two main financial statements of a business… The other is the Income Statement.
Corporate finance Summer 2017
Chapter 2 - Understanding Financial Statements, Taxes, and Cash Flows
Chapter 1 Accounting.
Chapter 1 Accounting.
The Balance Sheet.
Chapter 1 Accounting.
CHAPTER 9 THE BALANCE SHEET.
Presentation transcript:

The Balance Sheet

Elements of a Balance Sheet A balance sheet, also called the statement of financial position, lists: Assets Liabilities Owners Equity as of a specific date. It gives an idea of what the company is worth. $ IN $ OUT ?

Elements of a Balance Sheet Assets Assets are all those things a company owns which are of value to the business. Assets can be tangible like e.g. a manufacturing plant, computers or cash in the bank. Tangible assets like cash or goods for sale that can easily (i.e. within an accounting year) be converted into cash are called current assets while other assets like properties and equipment are called fixed assets. Assets can also be intangible (meaning cannot be touched) such as copyrights or goodwill. $ IN

Elements of a Balance Sheet Liabilities Liabilities are all those things for which the company eventually needs to pay. There are two types of liabilities: Current Liabilities need to be paid within one accounting year. Examples are: Outstanding rent, goods bought on credit. Long Term Liabilities are those liabilities which will not be paid during the current accounting year. Examples are: Long term debts, bank loans. $ OUT

Elements of a Balance Sheet ? Owner’s Equity Owner’s Equity is by definition the difference between the Assets of a company and its Liabilities. Owner’s Equity is the sum of two parts: Contributed Capital is the money that the owners invested in the company. Retained Earnings are those earnings which were not distributed to the owners. These can accumulate to a large sum over the years.

Elements of a Balance Sheet Remember: A Balance Sheet must balance the assets, liabilities and owner’s equity. Assets – Liabilities = Owner’s Equity Most commonly, the assets are on top and the liabilities and owner’s equity on the bottom. Let’s now have a look at a balance sheet. $ IN $ OUT

A Simple Balance Sheet

Completing a Balance Sheet

Elements of a Balance Sheet $ IN Assets – Current Assets Cash and Cash Equivalents Cash is all the cash the company has, be it in bank accounts or in the cash box. Cash Equivalents are short term investments that can be converted to cash with no or very little delay. Examples of Cash Equivalents are: Money Market Investments, Government Bonds. Accounts Receivable Most businesses do not immediately receive payment for (some or all) of the goods or services they sell. Assuming that payment will indeed be made in the near future, a receivable account is an asset.

Elements of a Balance Sheet Assets:Total Current Assets In this case, of course, its just the sum of ‘Cash and Equivalents’ and ‘Accounts Receivable’, but there could be many more ‘current’ items. Total current assets is an important item since it indicates how much money the company has to run its business.

Elements of a Balance Sheet Assets: Fixed Assets Plant and Equipment In order to run a business one usually will need to buy some equip- ment (even when one is in the service business) like e.g. machines and computers. The total cost price of the bought equipment is listed in this item (note, the fact that equipment becomes worth less is accounted for in the next item). Accumulated Depreciation Naturally, when one uses equipment it will get old and thus become worth less. It is therefore necessary to subtract a certain amount from the original equipment value every year. Since one would like to keep the original value listed above, one needs to ‘accumulate’ i.e. sum up all the previous year’s depreciations.

Elements of a Balance Sheet Assets: Net Fixed Assets In this case the net fixed assets are ‘Plant and Equipment’ minus ‘Accumulated Depreciation’, but there could be many more items. Note that having a lot of fixed assets does not necessarily mean that the company is ‘rich’. It is also important to realize that fixed assets do not provide cash for running the business (though they could be use as collateral for a loan).

Elements of a Balance Sheet Assets: Total Assets Total Assets = Current Assets + Net Fixed Assets Note: While total assets in a sense represent the current value of the business, they do not necessarily represent the resale value or the liquidation value of the business. The total assets are the value of the business as seem from the perspective of a continuation of the currently operating business.

Elements of a Balance Sheet $ OUT Liabilities: Current Liabilities Accounts Payable Just as there are accounts receivable, there are also accounts payable. Businesses usually do not need to pay immediately upon delivery but have e.g. 30 or 60 days ‘credit-terms’. In other words, ‘accounts payable’ are unpaid bills due soon. Other Current Liabilities All the liabilities which are due within one accounting year and which are not separately listed (in this case only accounts payable) are lumped together here. Examples are: unpaid salaries, interest, short term loans.

Elements of a Balance Sheet Liabilities: Total Current Liabilities The total current liabilities are an important indicator of how much money a company will need in the near future. If the total current liabilities are much bigger than the total current assets great caution is warranted.

Elements of a Balance Sheet Liabilities: Long Term Liabilities Long Term Debt While in daily life having debts (especially credit card debts!) is usually not a good thing, the proper use of long term loans is an essential part of many business activities. It is for example very rare that a company has enough cash to build a new state of the art manufacturing plant. The idea is of course that you earn more than you pay in interest. (This is somewhat similar to buying a condo with a mortgage). Other Long Term Liabilities All other liabilities which do not need to be returned within one accounting year and which are not separately listed. E.g. Royalties, asbestos claims.

Elements of a Balance Sheet Liabilities: Total Liabilities Total Liabilities = Total Current + Long Term Liabilities Note: If the Total Liabilities exceed the Total Assets, the company is almost certainly in some sort of danger. But there are exceptions to this! (Especially companies in new hot industries like e.g. dot.coms or genetics).

Elements of a Balance Sheet Liabilities: Owner’s or Shareholder’s Equity Common Stock When a corporation is set up or when it needs money and desires to do so, it can issue common stock. The amount received is entered under this item. Note that the value printed on the stock certificate may be quite different from what one actually pays. Retained Earnings At the end of an accounting year, a company can have a profit or a loss. The profit or loss (in case of loss, naturally with a minus sign) is added to the retained earnings. The retained earnings sum up all the profits and losses since the inception of the company (minus paid out dividends).

Elements of a Balance Sheet Liabilities: Total Owner’s or Shareholder’s Equity This is the amount the company ‘owes’ its shareholders. Note that from an operational point of view, these debts have no impact on the daily running of the business since they do not need to be repaid.

Elements of a Balance Sheet Liabilities: Total Liabilities and Owner’s Equity As such this item is mainly a cross check for the accuracy of the balance sheet. It must be exactly the same number as the total assets or something is wrong!

Key Points of the Day Assets – Liabilities = Owner’s Equity The Balance Sheet provides a snapshot of the assets and liabilities of a company. The Balance Sheet is one of the most important financial statements. Remember: Assets – Liabilities = Owner’s Equity $ OUT $ IN And again: Assets – Liabilities = Owner’s Equity