Its very good presentation for balance sheet

1. Topic - Balance Sheet
Submitted By - Hema Arya
Subject - Book Keeping and Accountancy
Subject Code - BCOM 102
Enrollment - 2313BCOMTAXPRO13679
Submitted To - Dr. Mohita Kushwaha

2. The Balance Sheet
• Summarizes the financial condition of
the business at a point in time
• Estimates net worth or owner equity.
• Most transactions affect the balance
sheet, so it may change daily.

3. Purpose of aBalance Sheet
• Everything “owned” and “owed” by a
business or individual at a given point in
time.
• Asset – anything of value owned.
• Liability – any debt or other financial
obligation owed to someone else.
• Owner Equity/Net worth – the amount
the owner has invested in the business.
• “Balance” idea:
Owner Equity = Assets –
Liabilities

4. Preparing a Balance Sheet
• Can be completed at anytime.
• Most are prepared at the end of the
accounting period
– Represents both end-of-the-year and beginning-of-
the-year.
• That is, end of year 1 = beginning of year 2!
– For comparison purposes and analysis.

5. General Format of a Balance Sheet
Assets
Current assets $XXX
Noncurrent assets
XXX
Total assets $XXX
Liabilities
Current liabilities $XXX
Noncurrent liabilities XXX
Total liabilities $XXX
Owner’s equity
Total liabilities and
owner’s equity
XXX
$XXX

6. Balance Sheet Analysis
• Used to measure the financial condition
of the business (management tool):
• Compare to other, but similar businesses.
• Compare to the same business over time.
• Lenders use balance sheet analysis to
make lending decisions and to monitor
the financial progress of their customers.

7. 23
Balance Sheet Analysis
A. Measures of Liquidity:
1. Current Ratio
2. Working Capital:
- not a ratio (in $), so size must be considered.
B. Measures of Solvency:
2. Debt/Asset Ratio
3. Equity/Asset Ratio
4. Debt/Equity Ratio

8. The Concept of Liquidity
• Short-term measure.
• Measures the ability to meet financial
obligations:
– As they come due.
– Without disturbing normal revenue
generating activities.
• Ability of the firm to generate cash for
running the business.

9. Measures of Liquidity
Current Ratio:
Total current farm assets ÷ Total current
farm liabilities or CA/CL:
Example from text: 112,500 ÷ 88,860 = 1.27
• Write the Current Ratio as 1.27:1
• Current assets compared to current liabilities.
• Values > 1 are preferred (safety margin).
• Larger ratios imply more liquidity.

10. Measures of Liquidity
Working Capital:
Total current farm assets - Total current
farm liabilities:
Example: $112,500 - $88,860 = $23,640
• Write the Working Capital as $23,640
• $ left after selling all current assets and
paying off all current liabilities.
• Margin of safety in a $ value.
• Compare to similar sized operations.

11. The Concept of Solvency
• Measures the degree to which liabilities
are backed up by assets.
• Measures liabilities relative to owner
equity.
• Ability to pay off all liabilities if all assets
were sold.

12. Measures of Solvency
Debt/Asset Ratio:
Total farm liabilities ÷ Total farm
assets Example: $368,860 ÷ $741,500
= 0.4975
Multiply by 100
• Write the Debt/Asset Ratio as 49.75%
• % (share) of total assets owed to lenders.
• Lower values are preferred.

13. Measures of Solvency
Equity/Asset Ratio:
Total farm equity ÷ Total farm
assets
Example: $372,640 ÷ $741,500 =
0.5025
Multiply by 100
• Write the Equity/Asset Ratio as 50.25%
• % of total assets financed by owner’s
equity capital.
• Higher values are preferred.

14. Measures of Solvency
Debt/Equity Ratio (leverage ratio):
Total farm liabilities ÷ Total farm equity
Example: $368,860 ÷ $372,640 = 0.99
• Write the Debt to Equity Ratio as 0.99:1
• Lender financing compared to owner financing.
• Smaller values are preferred.

15. 31
Balance Sheet Analysis
A. Concept of Liquidity:
1. Ability of the firm to generate cash
for running the business.
B. Concept of Solvency:
1. Ability to pay off all liabilities if assets are
sold.

16. 34
Statement of Owner's Equity
• Shows the source of changes in owner
equity and the amount that came from
each source.
• Where growth (or lack of growth) is
coming from:
– Reconciles beginning and ending owner
equity.

17. 35
Summary
• A balance sheet shows the financial position
of a business at a point in time.
• Assets can be valued using cost methods
or current market valuations.
• Liquidity measures the ability of the business
to meet financial obligations as they come due
and without disturbing normal production.
• Solvency measures the degree to which the
liabilities of the business are backed up by
its assets.

18. Thank You