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Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet
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Balance sheet

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A revision presentation on the balance sheet for clients of Aqhuman Financial Training

A revision presentation on the balance sheet for clients of Aqhuman Financial Training

Published in: Economy & Finance
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  • 1. www.aqhuman.com The balance sheet Aqhuman financial training & coaching
  • 2. www.aqhuman.com The balance sheet Assets Non-current (“fixed”) assets Property, plant and equipment Current assets Cash at bank Receivables (“debtors”) Inventories (“stocks”) Aqhuman financial training & coaching
  • 3. www.aqhuman.com The balance sheet Assets Non-current (“fixed”) assets Property, plant and equipment Current assets Cash at bank Receivables (“debtors”) Inventories (“stocks”) Aqhuman financial training & coaching Non-current assets we do not intend to liquidate
  • 4. www.aqhuman.com The balance sheet Assets Non-current (“fixed”) assets Property, plant and equipment Current assets Cash at bank Receivables (“debtors”) Inventories (“stocks”) Aqhuman financial training & coaching Current assets we do intend to liquidate (collect debtors, sell stock ...)
  • 5. www.aqhuman.com The balance sheet Assets Non-current (“fixed”) assets Property, plant and equipment Current assets Cash at bank Receivables (“debtors”) Inventories (“stocks”) What about People? Aqhuman financial training & coaching
  • 6. www.aqhuman.com What do we mean by an asset? •Items where the benefit has yet to come (equipment will produce goods in the future, debtors will provide cash in the future) •Are only assets to the extent that they represent a benefit •Are owned by the company (except for “finance leases”; these are leases which are loans in disguise) Aqhuman financial training & coaching
  • 7. www.aqhuman.com Non-current (or fixed) assets These assets are held for some time in the business and need to be depreciated Aqhuman financial training & coaching
  • 8. www.aqhuman.com Depreciation You buy some equipment, today, for £10,000. You estimate that it has a 5 year life, when you will scrap it. Balance 10 sheet Income statement Cash flow (10) Aqhuman financial training & coaching Today Today; all of the benefit of owning the equipment lies in the future. So the expenditure is entirely an asset
  • 9. www.aqhuman.com Depreciation You buy some equipment, today, for £10,000. You estimate that it has a 5 year life, when you will scrap it. Balance 10 10 Sheet (2) 8 Income Statement (2) Cash flow (10) Aqhuman financial training & coaching Today A year later 1/5th of the expected benefit has been used; so 1/5th of the spend is now a cost. This is depreciation 1 2
  • 10. www.aqhuman.com Depreciation You buy some equipment, today, for £10,000. You estimate that it has a 5 year life, when you will scrap it. Balance 10 10 Sheet (2) 8 Income Statement (2) Cash flow (10) Aqhuman financial training & coaching Today 1 2 10 10 10 10 (4) (6) (8) (10) 6 4 2 - (2) (2) (2) (2)
  • 11. www.aqhuman.com Receivables (“debtors”) •These are sums due from our customers. •Recall that assets are only assets to the extent that they represent a future benefit • So for debtors the future benefit is not how much we are owed... •But how much we expect to receive. So the debtor figure is the outstanding invoice sum less any bad or doubtful debts Aqhuman financial training & coaching
  • 12. www.aqhuman.com Inventories (“stocks”) •Again with inventories we can only show the future benefit •With stocks this is the possibility of selling them at a profit •However we cannot account for a profit until we have made it... •So stocks are shown at original purchase price, unless... •There is no future benefit (ie profit). We are going to make a loss on the stock. No benefit = no asset •Where we are going to make a loss we reduce the holding value of the stock to its likely net sales value Aqhuman financial training & coaching
  • 13. www.aqhuman.com What about people? Are people an asset? People are clearly an asset to a business... But are they an asset for accounting purposes? Aqhuman financial training & coaching
  • 14. www.aqhuman.com People There is only one industry where people are shown as accounting assets.... Aqhuman financial training & coaching
  • 15. www.aqhuman.com People There is only one industry where people are shown as accounting assets.... Professional sports players. Why? Assets need to be capable of being valued. Professional sport is the only sector where people are bought and sold. Thus the purchasing company has an amount. Note that if the sportsman was acquired free then he/she does not appear on the balance sheet (no amount) Aqhuman financial training & coaching
  • 16. www.aqhuman.com Intangible assets This issue with people (only purchased people can be shown as assets) also applies to intangible assets generally. Only purchased intangible assets may be shown on the balance sheet. The most common intangible asset we encounter is GOODWILL Aqhuman financial training & coaching
  • 17. www.aqhuman.com Goodwill What makes up a company’s goodwill? Aqhuman financial training & coaching
  • 18. www.aqhuman.com Goodwill What makes up a company’s goodwill? Aqhuman financial training & coaching staff Geographic spread Client quality brand Spread of products ability contacts loyalty quality
  • 19. www.aqhuman.com Goodwill But remember only purchased goodwill (like sportsmen) is shown on the balance sheet The company’s own inherent goodwill IS NOT shown; only that of companies’ it has purchased Aqhuman financial training & coaching
  • 20. www.aqhuman.com Goodwill and amortisation Goodwill is not amortised (depreciated) Instead an impairment test is done a year later. The company revalues its acquisition. If it would pay less than the original purchase price then the goodwill is written down An example... Aqhuman financial training & coaching
  • 21. www.aqhuman.com Goodwill example Company A has net assets worth £80m. Company B buys the company in 2011 for £110m. Aqhuman financial training & coaching £80m £80m £30m = goodwill
  • 22. www.aqhuman.com Goodwill example Company A has net assets worth £80m. Company B buys the company in 2011 for £110m. A year later it values the company at £100m. So the goodwill is reduced by £10m to £20m. Aqhuman financial training & coaching £80m £80m £30m = goodwill = £20m
  • 23. www.aqhuman.com Goodwill and the impairment review Note that in the last example the £10m write down is NOT amortisation (like depreciation, the transfer of an asset to cost due to its benefit being used up). Instead an impairment write down is the acknowledgment that company B overpaid for its acquisition. Aqhuman financial training & coaching
  • 24. www.aqhuman.com Liabilities Liabilities: Payables due in less than a year Trade payables (Creditors) Short term debt Payables due after more than a year Long term debt Shareholders’ Equity Share capital Retained earnings Aqhuman financial training & coaching There is not much to say about the liabilities. We shall discuss debt and equity when we consider gearing in the KPI presentation
  • 25. www.aqhuman.com The balance sheet Liabilities: Payables due in less than a year Trade payables (Creditors) Short term debt Payables due after more than a year Long term debt Shareholders’ Equity Share capital Retained earnings Aqhuman financial training & coaching Assets Non-current (“fixed”) assets Property, plant and equipment Current assets Cash at bank Receivables (“debtors”) Inventories (“stocks”) The total of these 2 columns will be equal. Assets= liabilities
  • 26. www.aqhuman.com The balance sheet; an example We buy a property for £10m, paying £2m cash, borrowing £5m and issuing £3m of shares Assets Property +£10m Cash -£2m Net effect +£8m Aqhuman financial training & coaching Liabilities Debt +£5m Equity (share capital) +£3m +£8m The balance sheet has increased by £8m on both sides: it balances
  • 27. www.aqhuman.com Balance sheet formats The asset = liability format shown so far is very popular around the world. But not in the UK! The balance sheet assets = liabilities: Property, plant and equipment Payables Receivables Debt Inventories Equity Cash Aqhuman financial training & coaching
  • 28. www.aqhuman.com Balance sheet format: UK In the UK the payables and debt are deducted from the assets: Property, plant and equipment Payables Receivables Debt Inventories Equity Cash Aqhuman financial training & coaching (Payables) (Debt) Net Assets Equity
  • 29. www.aqhuman.com Balance sheet example Take the earlier example using UK format: We buy a property for £10m, paying £2m cash, borrowing £5m and issuing £3m of shares Assets Liabilities Property +£10m Cash -£2m Equity +£3m (Debt) -£5m Net effect +£3m +£3m It still balances! Aqhuman financial training & coaching
  • 30. www.aqhuman.com Balance sheet summary •Assets represent future benefit and only to the extent that they represent a benefit •Non-current (“fixed”) assets are not intended to be liquidated when acquired (although one can one’s mind later) •Goodwill is only shown where it is purchased •There are a number of different balance sheet formats: assets= liabilities, net assets= equity Aqhuman financial training & coaching
  • 31. www.aqhuman.com Aqhuman Financial Training Aqhuman’s principal is Kevin Amor, FCA. Kevin qualified as a chartered accountant with PWC. He spent 12 years working in commerce at financial controller/director level. Kevin now has more than 12 years experience in financial training. He trains managers at all levels and gives 1 to 1 financial coaching to senior executives. He also teaches corporate finance and accounting for a number of business schools’ MBA programmes. Aqhuman financial training & coaching

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