BALANCE SHEETS

WHAT YOU NEED TO KNOW

A balance sheet is an accounting state that shows an organization's assets and liabilities at a particular point in time

It records the value of assets owned

What the organization owes to others (liabilities)

How the organization was financed

ASSETS

Assets are what the organization owns and what is owed to the organization.

Everything the organization owns that has a monetary value and/or a measurable cost can be seen as an asset

Assets bring financial benefit through their sale- for example selling assets such as stock or equipment

TYPES OF ASSETS Fixed AssetsProvide a benefit for more than 12 monthsTangible assetsIntangible assetsFinancial assets

Current AssetsProvide a benefit for less than 12 monthsStockDebtorsCash

LIABILITIES

The amount an organization owes to others and which have monetary value

The organization is obliged to pay its liabilities to other people or organizations

TYPES OF LIABILITIES Liabilities can be:

Short term (current liabilities)

Amounts due within 12 months

Trade creditors – money owed to suppliers

Financial debts- loan repayments within a year

Bank overdrafts – repayable on demand

Long term

Loans which have to be repaid over a period of more than 12 months

Long term trade creditors

Mortgage Loan

EQUITY, SHARE CAPITAL AND RESERVES

EquityThe total investment of shareholders in the company

Share Capital The capital of the company divided into shares

ReservesA fund belonging to the owners of the organization

which represents value retained in the organization

WHAT TO LOOK FOR.. Net AssetsAre they growing or declining?

Net Current AssetsBalance between current assets and current liabilities

Solvency of the business

Trade Debtors and Trade Creditor PaymentsVolume of debtors and creditors

Balance Between Debt and EquityCommitment to pay interest

INTERPRETING A BALANCE SHEET

ComparisonsHistorical

Competitors

Be Aware…A balance sheet for an organization in one type of

market will be very different from one in very different type of market

Competitor analysis is only useful if the firms are of similar size and product/service range

Take note of the date the balance sheet was produced- certain times of year may be more appealing…

WINDOW DRESSING

This is defined as presenting company accounts in a manner which enhances the financial position of the organization

The Balance Sheet does not show..The true value of an organization because it does not

include current value of intangible assets, or property.

Furthermore it does take into account depreciation and the quality of fixed assets

WHAT IS NOT THERE…

An Organization’s market value

Intangible Assets e.g. workforce, knowledge management

Market Share

True value of Fixed Assets

Performance trends or indicators

PROFIT AND LOSS STATEMENT

This shows how much profit or loss the organization has made over the reporting period

It measures an organization’s sales revenue and expenses over a period of 1 year

The key figure is net profit after interest and tax

WHY ARE PROFITS IMPORTANT

Profits are a motivating force

Profits provide financial reward for investors

Profits facilitate growth

Profits are a measuring rod of performance

Profits play a vital role in allocating resources

3 PARTS YOU NEED TO KNOW

Trading Account

P & L Account

Appropriation Account

COST OF SALES –ADVANCED FORMULA

Opening Stock $650 plus Purchases (additional stock purchased)

$1220 MinusClosing Stock (remaining stock at the end of accounting period)

($500)

Equals

Cost of Sales……. $

GROSS PROFIT

Tells you how well the Organization is trading but does not take into account all the cost

Measures how much was made directly from what the organization is selling, before it starts to pay overheads

NET PROFIT

This is equal to gross profit minus all indirect expenses

Arguably most important figure in P & L

PROFIT & LOSS V. BALANCE SHEET

Profit & Loss Balance Sheet

Main Elements Main Elements

Income (revenue) Assets

Expenses (costs) Liabilities

Profit or Loss Capital

Period Covered Period Covered

1 year A point in time

Main Focus Main Focus

Profits Value of net assets