Finanacial Statements

Balance Sheet & Profit and Loss Account

 A financial statement is a collection of data organised according to logical and consistent accounting procedures.

Four Basic Financial statements:

Balance Sheet Income Statement Statement of Cash Flows and a newer one -- Statement of Owner Equity

Balance Sheet Purpose

Determines solvency of businessability to meet both long term and short term obligations Gives concise summary of firms resources and obligations Gives a measure of firms liquidity

Balance Sheet basic Principles

The balance sheet is regarded as a separate accounting entity( entity concept) The figures are expressed in monetary units (monetary concept) The balance sheet assumes that the company is a going concern (going concern concept) The fixed assets are stated at cost less depreciation ( cost concept) The current assets are stated at cost or market value, whichever is lower (conservative concept) Assets are equal to liabilities (dual aspect concept)

The Balance Sheet

Name -- What does this represent?
Partnership, individual, combined Needs to be consistent over time

Date -- This is as of what date? (Snap Shot) Listing of all assets and all liabilities Balances at the bottom of form
Assets - Liabilities = Equity

XYZ Co As on 31.3.2011
Liabilities Current Liabilities - Accounts payable - Interest payable - Salary payable Long Term Liabilities Equity Assets Current assets - Cash - Inventories - Debtors Fixed assets Investments

Balance Sheet Asset Types

Current assets
Consumed or converted to cash in 12 months e.g. Inventory, prepaid expenses, cash, savings

Long Term or Fixed assets

e.g. land, buildings, stocks Selling would typically decrease volume or size of business

Asset Value Determination

Book Value (cost basis)
Useful for trend analysis

Fair Market Value

Useful to determine liquidation value

Balance Sheet Debt Types

Current liabilities
To pay in the next 12 months e.g. bills, accrued interest, taxes

Long Term
Scheduled originally to be paid in more than one year e.g. land debt, house payments

Parts of the Balance Sheet

(Current)
Liabilities -- What you owe someone else (against what you own)

Current Liabilities
What you are scheduled to pay in the next 12 months Unpaid bills, accrued interest, property taxes Operating loans Principal payments on term debts to be made in the next 12 months

Parts of the Balance Sheet

(Long Term)
Liabilities -- What you owe to someone else (against what you own)

Long Term Liabilities

What was scheduled originally as more than one years Land debt, house payments Match up to the long term assets

Equity
Preferred Stock (cumulative, Non cumulative, convertible, cumulative convertible) Common Stock or ordinary shares Contributed capital in excess of par Retained earning
Revenue reserve: from profit of normal business operations Capital reserve: Premium on issue of shares or gains on revaluation of assets

Debentures
Convertible Non convertible

How to Build a Balance Sheet

1) Do a count: Current, Long Term, 2) 2) Rupee Prices for each of the above.
Recommend both cost and market value for term assets

How to Build a Balance Sheet

3) Machinery list (depreciation schedule? Straight
line or WDV)

Cost less depreciation = book value

4) Assemble the above into the format 5) Add up the assets 6) Add up the debts 7) Assets minus debts = net worth or equity

Take out a Piece of Paper

Draw some lines and label like this:

Assets Current

Liabilities Current

Investments Equity Long Term Long Term

What is the Balance Sheet?

Picture in time -- a specific point, as in 31.3.20XX. Shows financial position--ability to handle risk Net result of past Very important component to track and monitor financial progress Basic building block for financial analysis

What a Balance Sheet is NOT

Does NOT necessarily tell you if the business is making money Does NOT tell you where net worth came from

Change in Net Worth

due to:

Retained Earnings
from profits earned and retained in business

Market Valuation Equity

from change in market value of assets

Valuation Equity
Rupee of asset value that are created because the market value of term assets is greater than the book value
Calculated by: + Total assets @ Market Value basis - Total Liabilities inc. Contingent Liabilities - Retained Earnings (contributed Capital)

Profit and Loss Account

It is a report of a firms activities during a given period of time It shows revenue and expenses of the firm, the effect of interest and tax, and the net income for the period

Functions of P& L Account

Gives concise summary of firms revenue and expenses Measures firms profitability

Measuring Earning
Accrual accounting: - Identify revenue - Matching the corresponding cost to revenue Revenue occurs when the earning process is complete and an exchange has taken place

Depreciation
It is a non cash charge used to match expenditure of creating asset with resulting revenue. Three estimate are required to calculate depreciation:
- Assets useful life - Its salvage value - Method of allocation (straight line, WDV)

Expense Recognition
Principle of associating cause and effect Principle of systematic and rational allocation (depreciation) Immediate recognition principle (selling and administrative expenses and all losses