Accounts Balance sheet 1

Learning Outcomes 2

Balance sheet Balance Sheet: Shows what a firm owns, what it owes and the value of the capital invested in the business at a point in time i.e. A statement of a firm’s value on a certain date Constituents: – Assets – Liabilities – Capital 3

Balance sheet assets Assets: What the business owns: – Fixed assets: Assets that will be held for more than one year – Current assets: Held for less than one year – Trade debtors: Customers who have bought goods on credit and owe money 4

Balance sheet liabilities Liabilities: What the business owes – Current liabilities: Due to be paid in less than one year – Trade creditors: Suppliers to whom the business owes money – Long-term liabilities: Due to be paid in more than one year 5

Balance sheet capital Capital: What the business owes its owners Share capital: Invested in the business by its shareholders Retained profit: Profit that has been accumulated over previous years 6 If you compare a company’s balance sheets for 2 successive years, the difference in retained profit from one year to the next is (theoretically) the retained profit figure in the second year’s P&L account.

Balance sheet the accounting equation The balance sheet is based around the principle that: 7 Shareholders’ funds (capital) AssetsLiabilities=– Fixed Assets: Buildings Van Current Assets: Stock Cash Less: Current liabilities: Trade creditors Net Current Assets Assets employed Financed by: Share capital Bank loan Capital employed Actually Bank Loan is a Long Term Liability. Company accounts these days show Long Term Liabilities in the Assets employed section. This simply involves rearranging the mathematical equation and does not therefore break the logic.

Balance sheet example I start up in business with: –£–£100 of share capital –a–a £50 long term loan I buy: –a–a building for £90 –a–a van for £20 –£–£30 of stock, for which I pay cash of £10 and have a month’s credit for the remainder 8 £100 £150 ( )( )( )( ) Fixed Assets: Buildings Van Current Assets: Stock Cash Less: Current liabilities: Trade creditors Net Current Assets Assets employed Financed by: Share capital Bank loan Capital employed £ £100 £50£150£90£60£20£40£30 (£20) This is not going to be examined in IGCSE Business Studies, but an understanding of where the numbers come from must help students to understand this tricky topic. Students can be given a copy of the handout to write on as you go through the slide. (PDF file) Click the buttons from 1 to 5 as they appear at the bottom of the slide. Watch how the balance sheet deals with each entry. Notice that every entry has two effects (a debit and a credit in accounting terminology, although that’s well beyond the requirements of a GCSE course – just like an equation in maths. Ask students what will happen before you click the button each time. Note since PowerPoint doesn’t provide a way to reset a slide, the only way to go through it again is to stop the presentation and start again.

Balance sheet Tesco plc balance sheet 9

Tesco plc balance sheet at 25 February Fixed assets Land and buildings 16,930 Equipment and vehicles 2,857 Intangible assets 23,864 Current assets Stocks 2,430 Debtors 1,311 Cash Less: Current liabilities Creditors 7,277 Bank overdraft 10,263 Net Current Liabilities (3,963) Assets Employed Financed by: Share capital 4,904 Retained profit 6,998 Bank loans Capital Employed £’000 4,077 2,559 6,300 2,986 19,901 7,999 19,901 As with the P&L account, the figures here have been somewhat ‘massaged’ to fit them into the standard GCSE balance sheet template:  Fixed Assets are called ‘non-current assets’  There was a disposal of an overseas subsidiary which was accounted for separately, but which we have added to the standard current assets/liabilities  The capital employed constituents have all been summarised  The Assets employed and Capital employed figures are the same as in the Tesco plc accounts The mouse click has been disabled on this slide, so you can write on it either with the PowerPoint annotation facility or your interactive whiteboard annotation facility

Balance sheet task – Tesco plc balance sheet What sort of fixed assets do Tesco have? Who might be their creditors? Who might be their debtors? 11

Balance sheet TOP TIP (1) A balance sheet must always balance – If it doesn’t, there’s a mistake The balance sheet lists assets in reverse order of liquidity – Fixed assets first (freehold land is the least liquid asset) – Current assets last (cash is the most liquid asset) Net current assets = Current assets – Current liabilities = Also called working capital – Positive working capital is important for good cashflow 12

Balance sheet TOP TIP (2) The top half of the balance sheet shows where the capital invested in the business is currently spent (assets employed) The bottom half of the balance sheet shows the long term sources of funds for the business (capital employed) As the business grows, retained profit is added to the capital employed – It is part of the capital as it ultimately belongs to the shareholders 13

Balance sheet Capital and Revenue expenditure 14

Capital and revenue expenditure Capital expenditure: Spending on new fixed assets Revenue expenditure: Expenditure on all other costs 15

Capital and revenue expenditure short task For each of the items of expenditure below, indicate whether it is capital or revenue expenditure: 16 Capital expenditure Revenue expenditure Advertising Machinery Raw materials Power Computers Office salaries Second-hand ferry Telephone bill

Balance sheet Summary questions 17

Balance sheets summary questions (1) For each of the questions below, indicate where the answer can be found: 18 What was the gross profit? What dividends did we pay shareholders? What is the total value of current assets? Trading and Profit & Loss Account Appropriation Account Balance Sheet

Balance sheets summary questions (2) For each of the questions below, indicate where the answer can be found: 19 What expenses did we incur last year? What was our net profit? What is our capital employed? Trading and Profit & Loss Account Appropriation Account Balance Sheet

Balance sheet Task – Ollie’s Fine Foods Ltd 20

Task Ollie’s Fine Foods Ltd The following balance sheet (next slide) is for Ollie’s Fine Foods Ltd, a retailer of locally grown organic foods The figures are for 2005 (shortened balance sheet) Questions – In what way is the balance sheet shortened? – State two likely fixed assets that Ollie, as an organic food retailer, might have – Use the following figures to create an extract of the balance sheet at 31 July 2006 Fixed assets: £139,000 Stock: £4,700 Debtors: £19,000 Cash: £2,100 Creditors: £18,700 Overdraft: £3,400 – Use the balance sheets to compare Ollie’s Fine Foods Ltd’s performance 21

Ollie’s Fine Foods Ltd balance sheets as at 31 July £’000 Fixed assets142,500 Current assets Stock5,400 Debtors14,600 Cash6,300 26,300 Current liabilities Creditors11,200 Overdraft1,100 (12,300) Net current assets14,000 Net assets employed156,500

Answers: Ollie’s Fine Foods Ltd balance sheets as at 31 July £’000 Fixed assets142,500139,000 Current assets Stock5,4004,700 Debtors14,60019,000 Cash6,3002,100 26,30025,800 Current liabilities Creditors11,20018,700 Overdraft1,1003,400 (12,300)(22,100) Net current assets14,0003,700 Net assets employed156,500142,700

QUIZ 1 QUIZ 2 24