balance sheet

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