1. The balance sheet Fred Wenstøp

2. 2 Assets Things owned by the business 100 Liabilities Amounts owed by the business 100 Assets Where money is spent 100 Liabilities Where money is obtained 100 Two perspectives on the balance sheet  Traditional perspective  Sources and uses of funds

3. Fred Wenstøp3 Structure of the balance sheet Fixed assets (FA) Current assets (CA) Assets 100 Owners’ funds (OF) Long-term loans (LTL) Current liabilities (CL) Liabilities 100

4. Fred Wenstøp4 Current assets  Short term assets that can be converted to cash quickly inventories accounts receivable (trade debtors) cash and cash equivalents miscellaneous pre-payments to suppliers Fixed assets (FA) Current assets (CA) Assets 100 Owners’ funds (OF) Long-term loans (LTL) Current liabilities (CL) Liabilities 100

5. Fred Wenstøp5 Fixed assets  All long term assets Intangibles Goodwill, patents, licences Net fixed assets Land and buildings plant and equipment transport computers office equipment Long term investments Shares in associated companies Fixed assets (FA) Current assets (CA) Assets 100 Owners’ funds (OF) Long-term loans (LTL) Current liabilities (CL) Liabilities 100

6. Fred Wenstøp6 Current liabilities  Short term liabilities to be paid within one year Account payable (creditors) Short term loans Bank overdrafts Interst bearing short term debts Miscellaneous Accrued payments interests current tax dividends due Fixed assets (FA) Current assets (CA) Assets 100 Owners’ funds (OF) Long-term loans (LTL) Current liabilities (CL) Liabilities 100

7. Fred Wenstøp7 Long-term loans  All long-term loans more than one year Fixed assets (FA) Current assets (CA) Assets 100 Owners’ funds (OF) Long-term loans (LTL) Current liabilities (CL) Liabilities 100

8. Fred Wenstøp8 Owners’ funds  All claims by the owners on the business Issued common stock Capital reserves Surplus from sources other than normal trading that cannot be distributed Revenue reserves Surplus from trading. Can be distributed as dividends, but not often used for that Fixed assets (FA) Current assets (CA) Assets 100 Owners’ funds (OF) Long-term loans (LTL) Current liabilities (CL) Liabilities 100

9. Fred Wenstøp9 Common terms  Total assets TA = FA + CA  Capital employed CE = FA + CA -CL CE = OF + LTL  Net Worth NW = FA + CA - CL - LTL NW = OF  Working capital (liquidity) WC = CA - CL Fixed assets (FA) Current assets (CA) Assets 100 Owners’ funds (OF) Long-term loans (LTL) Current liabilities (CL) Liabilities 100

10. Fred Wenstøp10 Profit and loss account Sales112 Operating costs100 PBITProfit before interest and tax 12 less interest2 PBT Profit before tax 10 less tax3 PATProfit after tax 7 less dividends 2 RERetained earnings 5

11. Fred Wenstøp11 Return on investment  ROTA = PBIT/TA Return on total assets Shows how well management uses all the assets in the business to generate an operating surplus  ROE = PAT/OF Return on equity Absolute return delivered to shareholders High ROE leads to a high share price  ROCE = PBIT/(OF + LTL) Return on capital employed