Balance Sheet
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FINANCIAL Statements Anjana Vivek www.bizkul.com [email protected] 1 www.biZkul.com
FINANCIAL ACCOUNTING: II
THE BALANCE SHEET 2 www.biZkul.com
BALANCE SHEET Shows the
Financial position or the state of affairs of the company At a point in time ACCOUNTING EQUATION: Assets = Liabilities + Owner’s equity 3 www.biZkul.com
CURRENT ASSETS
Cash and other assets which will be converted into cash in the next year Continuously circulated in the business The cycle of conversion depends on the operating cycle of the business Total current assets are equal to the gross working capital of the business 4 www.biZkul.com
CASH & MARKETABLE SECURITIES
Cash refers to cash and bank balances, for example cash in current account Marketable securities are investments which are readily realisable and mature in the short term, i.e. less than one year 5 www.biZkul.com
MARKETABLE SECURITIES
Marketable securities, i.e. current investments are to be shown at the lower of cost or fair value Interest and dividend are income, sometimes investment cost includes interest and dividend. Such amount related to pre acquisition period, is to be excluded from investment cost 6 www.biZkul.com
ACCOUNTS RECEIVABLE /SUNDRY DEBTORS Balance in this account gives details of the customer balances outstanding Balance is net of doubtful debts, as per management estimate
7 www.biZkul.com
ACCOUNTS RECEIVABLE /SUNDRY DEBTORS
Quality of accounts receivables is carefully studied by analysts for example: –Number of days outstanding (ie less than one month, more than 6 months etc.) –Number of days sales it relates to –Doubtful debts provision 8 www.biZkul.com
INVENTORY Items held for use in the manufacture or for sale Amount of inventory held depends on
–nature of business i.e. manufacturing or service –management strategy i.e. just in time inventory management 9 www.biZkul.com
INVENTORY CATEGORIES
Raw material Work in progress Finished goods Miscellaneous (stores/spares)
Goods in transit can be considered if legal ownership is with the company 10 www.biZkul.com
INVENTORY: IMPACT ON FINANCIALS Impacts P&L account – reflected as an expense in cost of materials used Impacts balance sheet – reflected in the closing stock of goods
11 www.biZkul.com
INVENTORY: VALUATION
One may assume that costs are costs, but there are costs and costs FIFO LIFO Weighted average Actual identifiable cost 12 www.biZkul.com
INVENTORY: VALUATION IMPACT EXAMPLE: FIFO in times of inflation Balance sheet will reflect stock at high (latest) prices P&L will reflect lower costs If goods are priced at cost plus, prices will not reflect market rates of goods 13 www.biZkul.com
INVENTORY: VALUATION IMPACT EXAMPLE: LIFO in times of inflation Balance sheet will reflect stock at low (old) prices P&L will reflect higher costs If goods are priced at cost plus, prices may not be competitive 14 www.biZkul.com
INVENTORY: VALUATION
Goods are to be shown at the lower of cost or realisable value Closing stock is physically counted – May be 100% – May be partial (ABC concept) – May be periodic and in rotation to cover all items
15 www.biZkul.com
PREPAID EXPENSES Some expenses may be paid in advance, such as rent, taxes, utility charges Expenses related to the following period are included in this They generally do not form a major component of the balance sheet
16
www.biZkul.com
PROPERTY, PLANT AND EQUIPMENT/FIXED ASSETS
Held to produce goods or provide services Not sold in the ordinary course of business Proportion of fixed assets to total assets depends on nature of business, i.e. whether a manufacturing or service company 17 www.biZkul.com
PROPERTY, PLANT AND EQUIPMENT/FIXED ASSETS
Proportion of fixed assets to total assets also depends on management strategy, for example decisions on renting vs. buying, outsourcing vs. producing in-house Management decisions on depreciation methods also impact net value in balance sheet 18 www.biZkul.com
FIXED ASSETS: COST
Cost includes purchase price and other direct costs, duties and taxes to bring asset to working condition for intended use Basket purchase: price can be allocated to different assets Hire purchase assets: interest component cannot form a part of asset cost 19 www.biZkul.com
OTHER ASSETS
Long term investments Intangible assets, such as goodwill Deferred expenses The impact of these assets on the balance sheet is something which analysts review carefully 20 www.biZkul.com
LIABILITIES
Obligations for – Future payments to be made for goods / services received – Goods to be supplied/service rendered against advance received
Classified into – Current liabilities – Long term liabilities
May be secured or unsecured 21 www.biZkul.com
CURRENT LIABILITIES
Claims to be satisfied in the next one year – Bills payable – Taxes and duties payable – Current portion of long term debt – Interest accrued but not due
22 www.biZkul.com
CURRENT LIABILITIES
When current liabilities are reduced from current assets, the resultant amount is the ‘Net working capital’
23 www.biZkul.com
ACCOUNTS PAYABLE / SUNDRY CREDITORS Obligation to pay to for credit purchase of goods or services This is an ongoing obligation and forms a part of the current liabilities This is analysed keeping in view the sales and purchases
24 www.biZkul.com
NOTES PAYABLE / BILLS PAYABLE Short term obligations to pay for credit extended Interest expense is to be shown separately
25 www.biZkul.com
ACCRUED LIABILITIES AND PROVISIONS
Expenses are recorded when incurred, irrespective of payment date Provisions are estimated liabilities, where the liability is certain but amount not definite for example pension liabilities, product warranties. A reasonable estimate is to be made 26 www.biZkul.com
DEFERRED TAXES
Companies are permitted to use different methods of accounting for income and expense for – financial reporting and for – tax calculation
As a result of there may be a temporary differences in calculation of tax payable and this temporary difference is accounted as deferred tax 27 www.biZkul.com
CONTINGENCIES
A contingent liability is a potential liability, dependent on the outcome of an uncertain event If this can be reasonably estimated - for example warranties - this must be disclosed in the accounts If this cannot be reasonably estimated, must be disclosed in notes to accounts 28 www.biZkul.com
COMMITMENTS Commitments are contractual obligations that will have a significant impact on the financials of the company in the future These should be disclosed in the notes to accounts
29 www.biZkul.com
DEBENTURES PAYABLE
Long term liability Loan – repayable with interest Interest is deductible as an expense, hence effective cost of borrowing is lower than interest rate
30 www.biZkul.com
DEBENTURES PAYABLE
May be secured debentures or unsecured Secured by way of: – Mortgage – immovable assets – land, building, machinery – Pledge – Physical possession given to lender – Hypothecation – borrower can use assets like vehicles 31 www.biZkul.com
DEBENTURES PAYABLE
Kinds of debentures Registered or unregistered Term or serial Convertible Option for calling Deep discount 32 www.biZkul.com
DEBENTURES PAYABLE
Debentures are rated by rating agencies They can be issued at face value (par value) or above or below this value; i.e. at discount or premium Debenture interest has to be provided on accrual basis Debenture issue expenses may be amortised over life of the same 33 www.biZkul.com
DEBENTURES PAYABLE
Debentures can be converted to equity – Unamortised discount or premium is adjusted to shareholder’s equity account
Debenture redemption fund is created by periodically investing surplus in income generating investments www.biZkul.com
34
MORTGAGE
Loan in which borrowing is secured by pledging specific immovable assets – Land, building, plant & machinery
May be conditional or equitable mortgage May be repaid in equal installments (EMI) or not 35 www.biZkul.com
LEASE
An agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time Finance lease transfers substantially all the risks and rewards incidental to ownership of asset (Asset and liability to be recognised) Operating lease is other than a finance lease (Expense in P&L account) 36 www.biZkul.com
SHAREHOLDERS’ EQUITY Common stock or equity share capital Preference share capital Reserves and surplus including retained earnings
37 www.biZkul.com
FINANCIAL ACCOUNTING: II
THE BALANCE SHEET 2 www.biZkul.com
BALANCE SHEET Shows the
Financial position or the state of affairs of the company At a point in time ACCOUNTING EQUATION: Assets = Liabilities + Owner’s equity 3 www.biZkul.com
CURRENT ASSETS
Cash and other assets which will be converted into cash in the next year Continuously circulated in the business The cycle of conversion depends on the operating cycle of the business Total current assets are equal to the gross working capital of the business 4 www.biZkul.com
CASH & MARKETABLE SECURITIES
Cash refers to cash and bank balances, for example cash in current account Marketable securities are investments which are readily realisable and mature in the short term, i.e. less than one year 5 www.biZkul.com
MARKETABLE SECURITIES
Marketable securities, i.e. current investments are to be shown at the lower of cost or fair value Interest and dividend are income, sometimes investment cost includes interest and dividend. Such amount related to pre acquisition period, is to be excluded from investment cost 6 www.biZkul.com
ACCOUNTS RECEIVABLE /SUNDRY DEBTORS Balance in this account gives details of the customer balances outstanding Balance is net of doubtful debts, as per management estimate
7 www.biZkul.com
ACCOUNTS RECEIVABLE /SUNDRY DEBTORS
Quality of accounts receivables is carefully studied by analysts for example: –Number of days outstanding (ie less than one month, more than 6 months etc.) –Number of days sales it relates to –Doubtful debts provision 8 www.biZkul.com
INVENTORY Items held for use in the manufacture or for sale Amount of inventory held depends on
–nature of business i.e. manufacturing or service –management strategy i.e. just in time inventory management 9 www.biZkul.com
INVENTORY CATEGORIES
Raw material Work in progress Finished goods Miscellaneous (stores/spares)
Goods in transit can be considered if legal ownership is with the company 10 www.biZkul.com
INVENTORY: IMPACT ON FINANCIALS Impacts P&L account – reflected as an expense in cost of materials used Impacts balance sheet – reflected in the closing stock of goods
11 www.biZkul.com
INVENTORY: VALUATION
One may assume that costs are costs, but there are costs and costs FIFO LIFO Weighted average Actual identifiable cost 12 www.biZkul.com
INVENTORY: VALUATION IMPACT EXAMPLE: FIFO in times of inflation Balance sheet will reflect stock at high (latest) prices P&L will reflect lower costs If goods are priced at cost plus, prices will not reflect market rates of goods 13 www.biZkul.com
INVENTORY: VALUATION IMPACT EXAMPLE: LIFO in times of inflation Balance sheet will reflect stock at low (old) prices P&L will reflect higher costs If goods are priced at cost plus, prices may not be competitive 14 www.biZkul.com
INVENTORY: VALUATION
Goods are to be shown at the lower of cost or realisable value Closing stock is physically counted – May be 100% – May be partial (ABC concept) – May be periodic and in rotation to cover all items
15 www.biZkul.com
PREPAID EXPENSES Some expenses may be paid in advance, such as rent, taxes, utility charges Expenses related to the following period are included in this They generally do not form a major component of the balance sheet
16
www.biZkul.com
PROPERTY, PLANT AND EQUIPMENT/FIXED ASSETS
Held to produce goods or provide services Not sold in the ordinary course of business Proportion of fixed assets to total assets depends on nature of business, i.e. whether a manufacturing or service company 17 www.biZkul.com
PROPERTY, PLANT AND EQUIPMENT/FIXED ASSETS
Proportion of fixed assets to total assets also depends on management strategy, for example decisions on renting vs. buying, outsourcing vs. producing in-house Management decisions on depreciation methods also impact net value in balance sheet 18 www.biZkul.com
FIXED ASSETS: COST
Cost includes purchase price and other direct costs, duties and taxes to bring asset to working condition for intended use Basket purchase: price can be allocated to different assets Hire purchase assets: interest component cannot form a part of asset cost 19 www.biZkul.com
OTHER ASSETS
Long term investments Intangible assets, such as goodwill Deferred expenses The impact of these assets on the balance sheet is something which analysts review carefully 20 www.biZkul.com
LIABILITIES
Obligations for – Future payments to be made for goods / services received – Goods to be supplied/service rendered against advance received
Classified into – Current liabilities – Long term liabilities
May be secured or unsecured 21 www.biZkul.com
CURRENT LIABILITIES
Claims to be satisfied in the next one year – Bills payable – Taxes and duties payable – Current portion of long term debt – Interest accrued but not due
22 www.biZkul.com
CURRENT LIABILITIES
When current liabilities are reduced from current assets, the resultant amount is the ‘Net working capital’
23 www.biZkul.com
ACCOUNTS PAYABLE / SUNDRY CREDITORS Obligation to pay to for credit purchase of goods or services This is an ongoing obligation and forms a part of the current liabilities This is analysed keeping in view the sales and purchases
24 www.biZkul.com
NOTES PAYABLE / BILLS PAYABLE Short term obligations to pay for credit extended Interest expense is to be shown separately
25 www.biZkul.com
ACCRUED LIABILITIES AND PROVISIONS
Expenses are recorded when incurred, irrespective of payment date Provisions are estimated liabilities, where the liability is certain but amount not definite for example pension liabilities, product warranties. A reasonable estimate is to be made 26 www.biZkul.com
DEFERRED TAXES
Companies are permitted to use different methods of accounting for income and expense for – financial reporting and for – tax calculation
As a result of there may be a temporary differences in calculation of tax payable and this temporary difference is accounted as deferred tax 27 www.biZkul.com
CONTINGENCIES
A contingent liability is a potential liability, dependent on the outcome of an uncertain event If this can be reasonably estimated - for example warranties - this must be disclosed in the accounts If this cannot be reasonably estimated, must be disclosed in notes to accounts 28 www.biZkul.com
COMMITMENTS Commitments are contractual obligations that will have a significant impact on the financials of the company in the future These should be disclosed in the notes to accounts
29 www.biZkul.com
DEBENTURES PAYABLE
Long term liability Loan – repayable with interest Interest is deductible as an expense, hence effective cost of borrowing is lower than interest rate
30 www.biZkul.com
DEBENTURES PAYABLE
May be secured debentures or unsecured Secured by way of: – Mortgage – immovable assets – land, building, machinery – Pledge – Physical possession given to lender – Hypothecation – borrower can use assets like vehicles 31 www.biZkul.com
DEBENTURES PAYABLE
Kinds of debentures Registered or unregistered Term or serial Convertible Option for calling Deep discount 32 www.biZkul.com
DEBENTURES PAYABLE
Debentures are rated by rating agencies They can be issued at face value (par value) or above or below this value; i.e. at discount or premium Debenture interest has to be provided on accrual basis Debenture issue expenses may be amortised over life of the same 33 www.biZkul.com
DEBENTURES PAYABLE
Debentures can be converted to equity – Unamortised discount or premium is adjusted to shareholder’s equity account
Debenture redemption fund is created by periodically investing surplus in income generating investments www.biZkul.com
34
MORTGAGE
Loan in which borrowing is secured by pledging specific immovable assets – Land, building, plant & machinery
May be conditional or equitable mortgage May be repaid in equal installments (EMI) or not 35 www.biZkul.com
LEASE
An agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time Finance lease transfers substantially all the risks and rewards incidental to ownership of asset (Asset and liability to be recognised) Operating lease is other than a finance lease (Expense in P&L account) 36 www.biZkul.com
SHAREHOLDERS’ EQUITY Common stock or equity share capital Preference share capital Reserves and surplus including retained earnings
37 www.biZkul.com
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