balance sheet
DESCRIPTION
It is all about Balance Sheet, its different components, types of balance sheet, case studiesTRANSCRIPT
In the Name of Allah, the Most Beneficent and Merciful
The Balance Sheet
“Old accountants never die; they just lose their balance”
--Anonymous
(A RAN project)
Presenters
Muhammad Awais Yaqoob2011-ch-32
Rizwan Liaquat2011-ch-72
Nanad Lal2011-ch-146
(University of Engineering and Technology, Lahore)
Contents
Balance sheet Types of Balance sheet Elements of a Balance sheet Case Study Interpretation
Accounting
Accounting is the art of communicating financial information about a business entity to users such as shareholders and managers.Is to record and analyze any financial transactions that have an influence on the utility of capital.
Income Statement
The income statement is a record of the financial gain or loss of the organization over a given period of time.Income Statement is a company's financial statement that indicates how the revenue is transformed into the net income.
What is a balance sheet?
The balance sheet shows the financial state of the business at any one moment
It is a list of all assets
(what the business owns) and
all the liabilities (what the
business owes) of a business.
Principle of Balance Sheet
The key principle of a balance sheet is
All assets must equal All Equities
Types of Balance Sheet
Based on Format of Preparation:
Horizontal and Vertical
Based on the Usage:Consolidated or Standalone
Based on the Period:Previous Year Balance Sheet Current Year Balance Sheet
Horizontal Balance Sheet
Horizontal analysis is also referred as trend analysis.It looks at amounts over the past years. The amount of cash reported on the balance sheet at December 31st of 2012, 2011 will be expressed as a percentage of the December 31st, 2011 amount.Instead of dollar amounts will be like 75, 60, 55 and 45.
Vertical Balance Sheet
It reports each amount as a percentage of another item. Each amount on the balance sheet is restated to be a percentage of total assets.If inventory is $100,000 and total assets are $400,000 then inventory is presented as
= 25%
Components of Balance Sheet
Major component of balance sheet are1. Asset2. Liabilities
Asset
An asset may be defined as anything of value, such as cash, land, equipment, raw materials, finished products, or any type of property.
An asset may be defined as anything of value, such as cash, land, equipment, raw materials, finished products, or any type of property.
CashCash Equivalents
Short-term InvestmentsAccounts receivables
InventoriesPrepaid Expenses
CashCash Equivalents
Short-term InvestmentsAccounts receivables
InventoriesPrepaid Expenses
Current Assets
Will be converted to cash or consumed
within one year.
Will be converted to cash or consumed
within one year.
Current AssetsCurrent Assets
Current assets are important coz they are used to fund day-to-
day operations and pay ongoing expenses
Fixed Assets
buildings, land, furniture and fixtures,
machines and vehicles.
buildings, land, furniture and fixtures,
machines and vehicles.
Not expected to be converted to cash or consumed within one year or the operating cycle, whichever is
longer.
Not expected to be converted to cash or consumed within one year or the operating cycle, whichever is
longer.
Fixed AssetsFixed Assets
Used for Tangible fixed assets
Used for Tangible fixed assets
Liabilities
The claims of anyone other than the owner
The claims of anyone other than the owner
Assets = liabilities + proprietorship
Current Liabilities
Accounts payable, Bank loans, Income taxes
payable, Interest payable
Accounts payable, Bank loans, Income taxes
payable, Interest payable
A company's debts or obligations that are to be paid within one year.
A company's debts or obligations that are to be paid within one year.
Current Liabilities
Current Liabilities
Long-term Liabilities
Loans Long-term Bonds
Loans Long-term Bonds
Debts or Obligations that will not be
satisfied within one year or operating
cycle, whichever is longer.
Debts or Obligations that will not be
satisfied within one year or operating
cycle, whichever is longer.
Long-Term Liabilities
Long-Term Liabilities
Current Ratio: The ratio of total current assets to total current
liabilities is called the current ratio.
Cash Ratio:The ratio of immediately available cash to total
current liabilities is known as the cash ratio.
Cash
The most liquid asset account is cash
Marketable securities are essentially equivalent to cash such as:
Certificates of deposits (CDs)
Treasury bills
Notes
Bonds
Other US government securities
Bankers’ acceptances, or
High-grade corporate commercial paper
Net Accounts Receivable
When a company sells its products or services on credit it is shown on the balance sheet as an accounts receivable
Accounts receivable remain on the balance sheet until they are collected
Some amount of accounts receivable will never be collected and, therefore, constitute a bad debt, or loss
Contd…
A company prepares for this by calculating the percentage of possible bad debt from prior actual experience as:
Net accounts receivable= Gross accounts receivable -allowance for doubtful accounts.
Inventories
For a manufacturer there are three forms of inventories: Raw materials, Work in process, and Finished goods
For a retailer, finished goods constitute the bulk of all inventories
Inventory can be valued using either the FIFO, LIFO, or average cost valuation method
Total Current Assets
The sum of the items listed above (cash, net accounts receivable and inventories) constitutes total current assets.
A current asset is, in general, an account that is expected to be converted into cash in less than one year.
Gross fixed assets, Accumulated depreciation and Net fixed assets
In general, any items of a fairly permanent nature that are required for the normal conduct of a business.
Fixed assets include equipment, buildings, vehicles, tools, computers, office equipment, leasehold improvements, furniture
Book Value
Accounting standards dictate that balance sheets report the value of fixed assets at book value
Book value is defined as the original historical cost (the purchase price paid by the company) minus allowable depreciation to date
All fixed assets, with the exception of land, are assumed to lose their economic value over time
Total Assets
The sum of all current and long-term assets equals total assets
These are the items that a firm uses to produce revenue
Notes Payable
Notes payable frequently represent the short-term borrowing of a company from a bank for the seasonal financing of current assets in particular, accounts receivable and inventory.
Accounts Payable
Whereas accounts receivable represent sales made by the company to customers on credit, trade accounts payable represent purchases (usually for inventory) made by the company from suppliers on credit
Accounts payable are, in general, a source of “interest free” financing for a company in the sense that if the company pays its accounts in a timely manner
Accrued Expenses
These expenses are usually paid at regular intervals
These include such items as utilities, rent, wages and salaries, and taxes
For example, if wages are paid every two weeks and the firm’s balance sheet is prepared in the middle of the pay period, wages owed as of that date would be reported as an accrual
Current Portion Of Long-term Debt
Sometimes firms borrow long-term money on an installment basis
That is, the firm makes periodic payments over the life of the loan that includes principal reduction as well as interest.
Sometimes called current maturities of long-term debt
The principal portion of these installment payments that is due over the next 12 months
Total Current Liabilities
The sum of the items listed above ( notes payable, accounts payable, accrued expenses, current portion of long-term debt ) constitutes total current liabilities
A current liability is, in general, a liability that is expected to be paid off in less than one year
A company normally pays off its current liabilities as current assets are converted into cash
Long-term debt
Used to finance long term assets such as land, building, and equipment. Also used to finance “permanent” current assets.
Common Stock
It is divided into two componentsCommon stock at par value
used to determine the number of shares currently outstanding.
Capital surplusrepresents additional money generated when
company actually sold the stock.
Preferred Stock
Preferred stock is a hybrid security including both elements of debt and equity
Retained Earnings
The cumulative total of all net income that has been reinvested into the company
To fund the expansion (replacement) of assets
Retained earning=Net income -Dividends paid.
Total Liabilities and Equity
The sum of total liabilities and total stockholders’ equity equals total liabilities and equity which, by definition, must be equal to total assets -a balance sheet must balance.
Case Study
Case StudyUsing the following (scrambled) accounts prepare a balance sheet for Gujjar Incorporated for the year ending December 31, 2003 (Amounts in Millions):1. Accounts payable 39
2. Accrued expenses 8
3. Accumulated depreciation 51
4. Additional paid-in capital 86
5. Allowance for doubtful accounts 2
6. Cash 23
7. Common stock 45
8. Current portion of L.T. Debt 6
9. Gross accounts receivable 40
10. Gross fixed assets 486
11. Inventories 54
12. Long term debt 210
13. Net accounts receivable 38
14. Net fixed assets 435
15. Retained earnings 138
16. Short-term bank loan (notes payable) 18
A Simple Balance SheetA B C D E F G
23 Golden Win Double Dragon International4 Balance Sheet56 Assets7 Cash and Equivalents 100008 Accounts Receivable 12009 Inventory 830010 Total Current Assets 19500 ^ =G7+G8+G911 Plant and Equipment 80012 Accumulated Depreciation 50013 Net fixed assets 300 ^ =G11-G1214 Total Assets 19800 ^ =G10+G1315 Liabilities and Owner's Equity16 Accounts Payable 760017 Other Current Liabilities 90018 Total Current Liabilities 8500 ^ =G16+G1719 Long Term Debt 120020 Total Liabilities 9700 ^ =G18+G1921 Common Stock 600022 Retained Earnings 410023 Total Shareholder's Equity 10100 ^ =G21+G2224 Total Liabilities and owner's Equity 19800 ^ =G20+G23
Let’s first clean this up a bit …and then look at it in more detail …
Cheer Up!
A Simple Balance SheetA B C D E F G
23 Golden Win Double Dragon International4 Balance Sheet56 Assets7 Cash and Equivalents 100008 Accounts Receivable 12009 Inventory 830010 Total Current Assets 19500 ^ =G7+G8+G911 Plant and Equipment 80012 Accumulated Depreciation 50013 Net fixed assets 300 ^ =G11-G1214 Total Assets 19800 ^ =G10+G1315 Liabilities and Owner's Equity16 Accounts Payable 760017 Other Current Liabilities 90018 Total Current Liabilities 8500 ^ =G16+G1719 Long Term Debt 120020 Total Liabilities 9700 ^ =G18+G1921 Common Stock 600022 Retained Earnings 410023 Total Shareholder's Equity 10100 ^ =G21+G2224 Total Liabilities and owner's Equity 19800 ^ =G20+G23
May be, it’squite simpleafter all!
Sum
Equals
A Simple Balance SheetA B C D E F G
23 Golden Win Double Dragon International4 Balance Sheet56 Assets7 Cash and Equivalents 100008 Accounts Receivable 12009 Inventory 830010 Total Current Assets 19500 ^ =G7+G8+G911 Plant and Equipment 80012 Accumulated Depreciation 50013 Net fixed assets 300 ^ =G11-G1214 Total Assets 19800 ^ =G10+G1315 Liabilities and Owner's Equity16 Accounts Payable 760017 Other Current Liabilities 90018 Total Current Liabilities 8500 ^ =G16+G1719 Long Term Debt 120020 Total Liabilities 9700 ^ =G18+G1921 Common Stock 600022 Retained Earnings 410023 Total Shareholder's Equity 10100 ^ =G21+G2224 Total Liabilities and owner's Equity 19800 ^ =G20+G23
May be, it’squite simpleafter all!
Sum
Equals
A Simple Balance SheetA B C D E F G
23 Golden Win Double Dragon International4 Balance Sheet56 Assets7 Cash and Equivalents 100008 Accounts Receivable 12009 Inventory 830010 Total Current Assets 19500 ^ =G7+G8+G911 Plant and Equipment 80012 Accumulated Depreciation 50013 Net fixed assets 300 ^ =G11-G1214 Total Assets 19800 ^ =G10+G1315 Liabilities and Owner's Equity16 Accounts Payable 760017 Other Current Liabilities 90018 Total Current Liabilities 8500 ^ =G16+G1719 Long Term Debt 120020 Total Liabilities 9700 ^ =G18+G1921 Common Stock 600022 Retained Earnings 410023 Total Shareholder's Equity 10100 ^ =G21+G2224 Total Liabilities and owner's Equity 19800 ^ =G20+G23
May be, it’squite simpleafter all!
Sum
Equals
A Simple Balance SheetA B C D E F G
23 Golden Win Double Dragon International4 Balance Sheet56 Assets7 Cash and Equivalents 100008 Accounts Receivable 12009 Inventory 830010 Total Current Assets 19500 ^ =G7+G8+G911 Plant and Equipment 80012 Accumulated Depreciation 50013 Net fixed assets 300 ^ =G11-G1214 Total Assets 19800 ^ =G10+G1315 Liabilities and Owner's Equity16 Accounts Payable 760017 Other Current Liabilities 90018 Total Current Liabilities 8500 ^ =G16+G1719 Long Term Debt 120020 Total Liabilities 9700 ^ =G18+G1921 Common Stock 600022 Retained Earnings 410023 Total Shareholder's Equity 10100 ^ =G21+G2224 Total Liabilities and owner's Equity 19800 ^ =G20+G23
May be, it’squite simpleafter all!
Sum
Equals
A Simple Balance SheetA B C D E F G
23 Golden Win Double Dragon International4 Balance Sheet56 Assets7 Cash and Equivalents 100008 Accounts Receivable 12009 Inventory 830010 Total Current Assets 19500 ^ =G7+G8+G911 Plant and Equipment 80012 Accumulated Depreciation 50013 Net fixed assets 300 ^ =G11-G1214 Total Assets 19800 ^ =G10+G1315 Liabilities and Owner's Equity16 Accounts Payable 760017 Other Current Liabilities 90018 Total Current Liabilities 8500 ^ =G16+G1719 Long Term Debt 120020 Total Liabilities 9700 ^ =G18+G1921 Common Stock 600022 Retained Earnings 410023 Total Shareholder's Equity 10100 ^ =G21+G2224 Total Liabilities and owner's Equity 19800 ^ =G20+G23
May be, it’squite simpleafter all!
SumEquals
A Simple Balance SheetA B C D E F G
23 Golden Win Double Dragon International4 Balance Sheet56 Assets7 Cash and Equivalents 100008 Accounts Receivable 12009 Inventory 830010 Total Current Assets 19500 ^ =G7+G8+G911 Plant and Equipment 80012 Accumulated Depreciation 50013 Net fixed assets 300 ^ =G11-G1214 Total Assets 19800 ^ =G10+G1315 Liabilities and Owner's Equity16 Accounts Payable 760017 Other Current Liabilities 90018 Total Current Liabilities 8500 ^ =G16+G1719 Long Term Debt 120020 Total Liabilities 9700 ^ =G18+G1921 Common Stock 600022 Retained Earnings 410023 Total Shareholder's Equity 10100 ^ =G21+G2224 Total Liabilities and owner's Equity 19800 ^ =G20+G23
May be, it’squite simpleafter all!
Same
It’s a Balance Sheet
Interpretation
All publicly traded companies include their yearly balance sheet in the annual report to provide a "snapshot" of the company’s financial situation
Investors get an idea as to what the company owns and owesassets-to-debt ratio = Total assets / Total Liabilities
Working capital is the money leftover if a company paid its current liabilities from its current assets
Working Capital = Current Assets – Current LiabilitiesCompany's liquidity and its ability to handle unexpected expenses
Interpretation
turnover ratio = Revenues / InventoryIf the turnover ratio is falling, it's a signal that unsold goods are sitting in stores or warehouses for longer periods of time, which is not what an investor likes to see.
Any Question