1. Learning objectives
Understand how a balance sheet can be used to assess performance
Understand concept of depreciation
Understand working capital cycle

2. Why examine the balance sheet?
Recognise scale & worth of business
Calculate net assets of a business – what is the value to the shareholders?
Gain an understanding of the nature of the firm
Identify the company’s liquidity position
Show sources of capital
Recognise significance of changes over time

3. ROCE
Operating profit
Capital employed x 100

4. Business Expenditure Revenue expenditure Capital expenditure
Spending on day-to day items, e.g. raw materials, wages, utilities
Capital expenditure
Spending on non-current (fixed) assets – those used repeatedly in the production process, e.g. buildings, machinery, vehicles

5. Why is this important? Matching, or accruals concept
When calculating profit, any income should be matched to the expenditure involved in creating that income

6. Prudence
Accounting convention that states that accounts should ensure that the worth of the business is not exaggerated
What about ‘window dressing’?

7. Depreciation
The fall in value of an asset over time, reflecting the wear and tear of the asset as it becomes older, the reduction in its economic use or its obsolescence

8. Straight-line depreciation
(also ‘reducing-balance’ depreciation)
Annual provision for depreciation =
Initial cost – residual value
expected lifetime (in years)
Warning – based on subjectivity!

9. Working capital Net current assets (same thing!)
Day-to-day finance used in a business
Current assets – current liabilities

10. Rule of thumb
Twice as many current assets as current liabilities
Why?

11. Working capital cycle Length = Length of time that goods are held +
Time taken for receivables to be paid -
Period of credit received from suppliers