2. Unit 3 Balance Sheets Business Management

3. Objectives zDistinguish between assets and liabilities. zGive examples of each category of assets and liabilities. zDescribe the structure and major components of a balance sheet. zAccurately transfer financial information to a balance sheet.

4. Statement of Cash flows Business Analysis Balance Sheet Income Statement Feasibility Liquidity Repayment Capacity Profitability Financial Efficiency Risk Solvency Statement of Owner’s Equity

5. Purpose of a Balance Sheet zShows financial condition at a specific point in time. solvency yShows solvency (do assets exceed liab. ?) liquidity yMeasure liquidity (will firm meet financial obligations?)

6. Purpose of Balance Sheet zFinancial Condition - cont. yEvaluate risk-bearing capacity (how much loss could business sustain?) yIdentify collateral (avail. to support loan) yCompare records over time to see trends.

7. Components of Balance Sheet zAssets zLiabilities zOwner Equity

8. Assets zCurrent yUsed or sold and converted to cash within 12 months zNon-current yUsed in producing a product or not sold and not converted into cash within 12 months.

9. Liabilities zCurrent yPayable within one year. zNon-current yDue in more than one year.

10. Owner Equity zTotal assets - Total liabilities zSame as Net Worth

11. Analysis zLiquidity yWorking Capital=CA-CL xCash available to run the business. yCurrent Ratio= CA/CL xMinimum- 1.0 xBench mark- 2.0

12. Analysis zSolvency yDebt-to-Asset Ratio=TL/TA xMeasures risk exposure of the business. xBenchmarks 0.5 or lower

13. Analysis zSolvency yEquity-to-Asset=OE/TA xMeasures percent ownership of the business. xBenchmarks Higher % the better

14. Analysis zSolvency yDebt-to-Equity=TL/OE x Leverage ratio-Measures debt capital usage compared to owner capital usage. xBenchmarks 1 : 1

15. Analysis zValuation of Assets is important to ratio evaluation. zMarket value of assets gives a broader picture so must include all liabilities. zCost valuation is more conservative and lower risk but probably not as true a picture of current financial condition.