1-Balance Sheet
The balance sheet is also referred to as the statement of financial position.
The balance sheet presents a company's financial position at the end of a specified date.
Some describe the balance sheet as a "snapshot" of the company's financial position at a point (a
moment or an instant) in time. For example, the amounts reported on a balance sheet dated
December 31, 2015 reflect that instant when all the transactions through December 31 have been
recorded.
Because the balance sheet informs the reader of a company's financial position as of one moment in
time, it allows someone—like a creditor—to see what a company owns as well as what it owes to
other parties as of the date indicated in the heading. This is valuable information to the banker who
wants to determine whether or not a company qualifies for additional credit or loans. Others who
would be interested in the balance sheet include current investors, potential investors, company
management, suppliers, some customers, competitors, government agencies, and labor unions.
its major components include:
Assets
Liabilities
Owner's (Stockholders') Equity
Owner's (Stockholders') Equity
Owner's Equity—along with liabilities—can be thought of as a source of the company's assets.
Owner's equity is sometimes referred to as the book value of the company, because owner's
equity is equal to the reported asset amounts minus the reported liability amounts.
Owner's equity may also be referred to as the residual of assets minus liabilities. These references
make sense if you think of the basic accounting equation:
Assets = Liabilities + Owner's Equity
and just rearrange the terms:
Owner's Equity = Assets - Liabilities
"Owner's Equity" are the words used on the balance sheet when the company is a sole
proprietorship. If the company is a corporation, the words Stockholders' Equity are used instead of
Owner's Equity. An example of an owner's equity account is Mary Smith, Capital (where Mary
Smith is the owner of the sole proprietorship). Examples of stockholders' equity accounts include:
Common Stock
Preferred Stock
Paid-in Capital in Excess of Par Value
Paid-in Capital from Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Income
Etc.
Both owner's equity and stockholders' equity accounts will normally have credit balances
Example Balance Sheet
ASSETS
Current Assets
Cash $ 20,000
Accounts receivable $ 15,000
Inventory $ 150,000
Total Current Assets $ 185,000
Non-Current Assets
Plant and equipment $ 50,000
Business premises $ 650,000
Vehicles $ 70,000
Total Non-Current Assets $ 770,000
TOTAL ASSETS $ 955,000
Current Liabilities
Accounts payable $ 25,000
Bank overdraft $ 10,000
Credit card debt $ 5,000
Tax liability $ 30,000
Total Current Liabilities $ 70,000
Non-Current Liabilities
Long term business loan 1 $ 450,000
Long term business loan 2 $ 50,000
Total Non-Current Liabilities $ 500,000
TOTAL LIABILITIES $ 570,000
NET ASSETS $ 385,000
Owner s EQUITY $ 385000
2- Income Statement:
The financial record of the business’s profits, costs and revenues over a given
period of time.
3- Cash Flow Statement
Financial statement showing the business cash inflows and outflows over a period of time.
A company’s cash flow can improve by either:
1) Increasing cash inflows:
- Selling more goods for cash
- Asking debtors to pay the company back faster/sooner
- Borrowing money from an external source
- Selling shares/investing money in the business
2) Decreasing cash outflows:
- Delaying payment to suppliers
- Buying from cheaper suppliers
- Buying on credit/trade credit
Net cash flow = cash inflow- cash out flow
Note: Ending cash at the end of the month will be the same as the opening cash of the following
month
Use of cash flow forecast: To keep the manager informed about when to repay a loan, an overdraft
or when they should expect trade receivables so that they don’t have a negative cash flow and fail.
(Successful businesses can run out of cash as well if they don’t manage their cash flow and it’s one
of the reasons why businesses fail; bad time management of trade receivables and payables)
Judging the success of a company’s financial year/Profitability ratios
- Profit Margin= Profit x 100/Revenue
- Gross profit margin = Gross profit x 100/revenue
- ROCE= Profit x 100
- Capital employed
- Current Ratio= current assets/current liabilities
Current ratio: is how well a company can meet (pay) its short term liabilities on demand.
- Acid Test Ratio: Current assets- Inventory (Stock)
Current Liabilities
