Balance Sheet CMD


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Balance Sheet CMD

  1. 1. The Balance Sheet Higher/Int 2 Business Management 2009-2010
  2. 2. What The Balance Sheet Shows <ul><li>This is a statement which shows the assets and liabilities of an organisation at a particular point in time. </li></ul><ul><li>Assets are what the organisation owns . </li></ul><ul><li>Liabilities are what the organisation owes . </li></ul>
  3. 3. Why? The Balance Sheet <ul><li>The basic idea of the Balance Sheet is pretty simple. </li></ul><ul><li>It records where the business got its money from and what it has done with it . </li></ul><ul><li>The two balance out giving the Balance Sheet its name. </li></ul>
  4. 4. Assets, Liabilities and Capital <ul><li>The Balance Sheet shows the assets and liabilities of an organisation at a particular point in time, balanced against the money invested. </li></ul><ul><li>Capital is the money invested in the organisation. </li></ul>
  5. 5. The Accounting Equation <ul><li>The Balance Sheet forms the balancing accounting equation: </li></ul><ul><li>Assets - Liabilities = Capital </li></ul>
  6. 6. When? Do We Balance? <ul><li>The Balance Sheet is drawn up at the end of the accounting period as part of the preparation of the final accounts . </li></ul><ul><li>The Balance Sheet is out of date by the time it is published (this could be 3 months after the end of the financial year). </li></ul><ul><li>Therefore the Balance Sheet forms part of the historical accounting records . </li></ul>
  7. 7. Assets <ul><li>The two different types of assets owned by organisations are: </li></ul><ul><ul><li>Fixed Assets </li></ul></ul><ul><ul><li>Current Assets </li></ul></ul>
  8. 8. Fixed Assets <ul><li>Fixed assets are assets which the organisation expects to last for more than one year : </li></ul><ul><li>e.g. Buildings, Machinery,Vehicles </li></ul><ul><li>The Balance Sheet shows the value of fixed assets as the value at the end of the financial year . This is the value after depreciation has been accounted for. </li></ul>
  9. 9. Fixed Assets <ul><li>Fixed assets are the productive assets of an organisation. </li></ul><ul><li>They enable the organisation to operate on a day to day basis. </li></ul><ul><li>The Balance Sheet, lists fixed assets expected to last the longest first . </li></ul>
  10. 10. Current Assets <ul><li>Current assets are assets which the organisation expects to last for only a few months : </li></ul><ul><li>e.g. Stock, Debtors, Cash in the Bank </li></ul><ul><li>The Balance Sheet lists current assets in order of increasing liquidity . </li></ul>
  11. 11. Current Assets (In Order) <ul><li>Stock : The least liquid, including raw materials and finished products. </li></ul><ul><li>Debtors : The value of products sold that have not yet been paid for by customers. </li></ul><ul><li>Cash : The most liquid current asset. </li></ul>
  12. 12. Current Liabilities <ul><li>Current Liabilities are any payments the organisation will have to make over the next 12 months . </li></ul><ul><li>This is money which doesn’t really belong to the organisation, they will need to pay it to someone else pretty soon. </li></ul>
  13. 13. Current Liabilities <ul><li>Creditors : The opposite of debtors, this is money that the organisation owes to its suppliers. </li></ul><ul><li>Corporation Tax : This is payable to the government, based on last year’s profits. </li></ul><ul><li>Unpaid Dividends : Dividends which have not yet been paid to shareholders, but have been promised to them. </li></ul>
  14. 14. Net Current Assets <ul><li>The figure of Net Current Assets is found from the total Current Assets, less the total Current Liabilities . </li></ul><ul><li>This figure is also known as Working Capital . </li></ul><ul><li>Working Capital is the finance available to operate the organisation on a day to day basis . </li></ul>
  15. 15. Current Assets Current Liabilities <ul><li>When the total current liabilities are greater than the total current assets , this shows that the organisation is in potential financial difficulty . </li></ul><ul><li>It may be unable to meet its most immediately payable debts . </li></ul>
  16. 16. Current Assets Current Liabilities <ul><li>In extreme cases , the organisation may have to sell off some of its fixed assets to meet the current liabilities. </li></ul><ul><li>Fixed assets are the productive assets to an organisation so this is a dangerous path to have to follow. </li></ul>
  17. 17. Net Assets <ul><li>The figure of Net Assets is found from the total value of Fixed Assets, plus the total value of Net Current Assets . </li></ul><ul><li>This figure is also known as Capital Employed . </li></ul>
  18. 18. Financed By: <ul><li>This section of the balance sheet shows how Net Assets have been financed. </li></ul><ul><li>This includes: </li></ul><ul><ul><li>Issued Share Capital (Shares) </li></ul></ul><ul><ul><li>Reserves from Profit and Loss Account </li></ul></ul><ul><ul><li>Any Long Term Liabilities (e.g. Mortgages) </li></ul></ul>
  19. 19. Sole Traders and Partnerships <ul><li>The Balance Sheet of a sole trader or partnership has the same layout as that of a limited company. </li></ul><ul><li>However, an additional term ‘Drawings’ may appear. </li></ul><ul><li>Drawings are the value of resources that an owner takes for their private use . These can be taken in the form of cash , goods or services . </li></ul>
  20. 20. Interpretation <ul><li>The Balance Sheet can help us to answer the following questions: </li></ul><ul><ul><li>Do we have sufficient liquid assets to meet our short term debts? (ie. Enough working capital to avoid cash flow problems?) </li></ul></ul><ul><ul><li>Are we making enough use of free credit facilities available to us? </li></ul></ul><ul><ul><li>Is our level of debt comparable to that of our industry competitors? </li></ul></ul>
  21. 21. Task <ul><li>Read pages 6-10 from your core notes. </li></ul><ul><li>Using the knowledge gained from this presentation and the relevant pages in the core notes, answer Activity 4 on the Balance Sheet. </li></ul>