How to Read a Financial Statement III
The Balance Sheet is a snapshot of a business’s financial position (what it owes and owns) at a particular moment in time.
The Balance Sheet is based on the accounting equation:
Assets = Liabilities + Owners’ Equity
Fixed assets are assets that a business does not buy/sell as part of its business.
Tangible assets are physical things, eg buildings, machinery etc.
Intangible assets include brand names, patents, licences, goodwill (the amount by which the price of a business exceeds its assets) etc.
Current assets are assets that can be converted to cash within a year, eg inventory (stocks of goods for sale or raw material), debtors (money not yet received for sales), investments, cash etc.
Cureent Liabilities are debts due in the next 12 months, eg creditors (money owed to suppliers), accrued expenses (phone, rent… incurred but not yet paid), outstanding dividends, tax due within next year.
Long Term Liabilities money owed but not due within next year, eg bank loans.
Net Current Assets (working capital) =
C urrent Assets – Current Liabilities.
Total Assets less Current Liabilities =
F ixed Assets + Current Assets -
Current Liabilities.
Net Assets = Total Assets – Total Liabilities.
Shareholder’s funds (owners’ equity) must equal net assets.
Share Capital is the money put into the business by shareholders.
Retained Profit is the cumulative retained profit from the Profit and Loss Account since the business started.
Revaluation Reserve results from a business revaluing assets (eg buildings) at current rather than original costs.
| Balance Sheet | |
| Â | Â |
| Fixed Assets | Â |
| Tangible | 254 |
| Intangible | 89 |
| Investments | 12 |
| Total Fixed Assets | 343 |
| Â | Â |
| Current Assets | Â |
| Inventory | 42 |
| Debtors | 62 |
| Cash | 36 |
| Other | 10 |
| Total Current Assets | 150 |
| Â | Â |
| Current Liabilities | Â |
| Creditors | 39 |
| Accrued Expenses | 6 |
| Dividends | 24 |
| Taxation | 25 |
| Total Curent Liabilities | 94 |
| Â | Â |
| Long-Term Liabilities | Â |
| Bank Loan | 18 |
| Total Long-Term Liabilities | 18 |
| Â | Â |
| Total Assets less Liabilities | 381 |
| Â | Â |
| Shareholder’s Funds | Â |
| Share Capital | 212 |
| Retained Profit | 149 |
| Revaluation Reserve | 20 |
| Total Shareholder’s Funds | 381 |
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