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# Lesson 13: Balance Sheet and Key Financial Ratios

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Watch this with a 10-15 minute audiotrack at http://vimeo.com/novusprogram/lesson13 …

Watch this with a 10-15 minute audiotrack at http://vimeo.com/novusprogram/lesson13

This lesson introduces two important topics in business finance: the balance sheet and financial ratios. The balance sheet shows all of the assets, liabilities, and equity of a company at a point in time. Using the information on the balance sheet and the income statement, we can calculate several financial ratios that help us understand how a business is performing.

The Novus project is a combination of video tutorials designed to be used in conjunction with a free business simulation software program. The Novus Business and IT Program contains 36 business and IT training videos, covering basic finance, accounting, marketing, economics, business strategy, Word, Excel, and PowerPoint. Users will have an opportunity to apply the lessons in the Novus Business Simulator. Over six rounds, the user or teams will have to make decisions on capital purchases, financing, production, financing, and human resources for a microbrewery. This channel has arranged the 36 video lessons into the order in which they are meant to be used with the simulator. To watch this slideshow as a video, please go to our Vimeo page at: https://vimeo.com/novusprogram. To download our free business simulation software, please go to our SourceForge page at: http://sourceforge.net/projects/novus/.

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• 1. The Balance Sheet and Key Financial Ratios Training Objective: To understand the Balance Sheet and some key financial ratios.Novus Business and IT Training Program
• 2. The Balance SheetThe Balance Sheet is a financial statement that iscreated at intervals, usually every 3 months andevery year.It is like photograph. It shows values at a givenpoint in time.Novus Business and IT Training Program 1
• 3. The Balance SheetThe balance sheet shows values in three mainsegments: – Assets What the company owns – Liabilities What the company owes – Equity How much the owners have investedNovus Business and IT Training Program 2
• 4. AssetsAssets are divided into two major categories: Current Assets: Fixed Assets: Cash Property, Plant and Equipment Short-Term Investments Intangible Assets Inventory Accumulated Depreciation Pre-Paid Expenses Other Accounts Receivable Reserves Against ReceivablesNovus Business and IT Training Program 3
• 5. Sample Balance SheetUnder each main segment there are a number of accounts. Star Hat Store Balance Sheet Dec 31 2011 Dec 31 2010 Assets Cash 20,000 65,000 Inventory 143,600 107,000 Accounts Receivable 30,000 0 Property, Plant & Equipment (gross) 60,000 60,000 Accumulated Depreciation -10,000 0 Net Property, Plant & Equipment 50,000 60,000 Total Assets 243,600 232,000 Liabilities Accounts Payable 64,000 32,000 Current portion of long-term debt 5,000 0 Long-term Debt 60,000 90,000 Total Liabilities 129,000 122,000 Equity Paid-In Capital 110,000 110,000 Retained Earnings 4,600 0 Total Equity 114,600 110,000 Novus Business and IT Training Program 4
• 6. LiabilitiesLiabilities are also divided into two major categories: Current Liabilities: Long-term Liabilities: Accounts Payable Long-term Debt Short-Term Debt Current portion of long-term debtNovus Business and IT Training Program 5
• 7. Sample Balance SheetUnder each main segment there are a number of accounts. Star Hat Store Balance Sheet Dec 31 2011 Dec 31 2010 Assets Cash 20,000 65,000 Inventory 143,600 107,000 Accounts Receivable 30,000 0 Property, Plant & Equipment (gross) 60,000 60,000 Accumulated Depreciation -10,000 0 Net Property, Plant & Equipment 50,000 60,000 Total Assets 243,600 232,000 Liabilities Accounts Payable 64,000 32,000 Current portion of long-term debt 5,000 0 Long-term Debt 60,000 90,000 Total Liabilities 129,000 122,000 Equity Paid-In Capital 110,000 110,000 Retained Earnings 4,600 0 Total Equity 114,600 110,000 Novus Business and IT Training Program 6
• 8. BalanceHere is the balance: Assets = Liabilities + Equity How the Where the money money is comes from being usedNovus Business and IT Training Program 7
• 9. Sample Balance Sheet Assets = Liabilities + Equity Star Hat Store Balance Sheet Dec 31 2011 Dec 31 2010 Assets Cash 20,000 65,000 Inventory 143,600 107,000 243,600 = 129,000 + 114,600 Accounts Receivable 30,000 0 Property, Plant & Equipment (gross) 60,000 60,000 Accumulated Depreciation -10,000 0 Net Property, Plant & Equipment 50,000 60,000 Total Assets 243,600 232,000 Liabilities Accounts Payable 64,000 32,000 Current portion of long-term debt 5,000 0 Long-term Debt 60,000 90,000 Total Liabilities 129,000 122,000 Shareholders Equity Paid-In Capital 110,000 110,000 Retained Earnings 4,600 0 Total Shareholders Equity 114,600 110,000Novus Business and IT Training Program 8
• 10. Safety: Debt to Equity Ratio Star Hat Store Balance Sheet Dec 31 2011 Dec 31 2010Assets Cash 20,000 65,000 Debt to Equity Ratio Inventory 143,600 107,000 Accounts Receivable 30,000 0 129,000 Property, Plant & Equipment (gross) 60,000 60,000 Accumulated Depreciation -10,000 0 Net Property, Plant & Equipment 50,000 60,000 = 1.1x Total Assets 243,600 232,000Liabilities 114,600 Accounts Payable 64,000 32,000 Current portion of long-term debt 5,000 0 Long-term Debt 60,000 90,000 Total Liabilities 129,000 122,000Shareholders Equity Paid-In Capital 110,000 110,000 Retained Earnings 4,600 0 Total Shareholders Equity 114,600 110,000Novus Business and IT Training Program 9
• 11. Using Financial Statements Together Star Hat Store Income Statement Star Hat Store Balance Sheet Year Ending Year Ending 31-Dec-11 31-Dec-10 31-Dec-2011 31-Dec-2010 Assets Cash 20,000 65,000Sales 100,000 80,000 Inventory 143,600 107,000 Cost of Goods Sold - 65,000 55,000 Accounts Receivable 30,000 0 Property, Plant & Equipment (gross) 60,000 60,000Gross Income = 35,000 25,000 Accumulated Depreciation -10,000 0 Selling General and - 15,000 15,000 Net Property, Plant & Equipment 50,000 60,000 Admin Expenses Total Assets 243,600 232,000 LiabilitiesOperating Income = 20,000 10,000 Accounts Payable 64,000 32,000 Other Income and Exp - 8,000 8,000 Current portion of long-term debt 5,000 0 Long-term Debt 60,000 90,000Pre-Tax Income = 12,000 2,000 Total Liabilities 129,000 122,000 Taxes - 2,400 400 Shareholders Equity Paid-In Capital 110,000 110,000Net Income = 9,600 1,600 Retained Earnings 4,600 0 Total Shareholders Equity 114,600 110,000 9,600 Return on Equity: = 8.4% 114,600 Novus Business and IT Training Program 10