X+3.5+c+Balance+Sheets

= 3.5 c Final Accounts : BALANCE SHEETS =

__KEY WORDS__ : ASSETS LIABILITIES SNAPSHOT CURRENT FIXED LONG TERM WORKING CAPITAL NET ASSETS EMPLOYED NET CAPITAL EMPLOYED A.K.A STOCKHOLDER EQUITY NET ASSETS EMPLOYED = NET CAPITAL EMPLOYED DEPRECIATION STRAIGHT LINE REDUCING BALANCE STOCK EVALUATION ( FIFO v LIFO)


 * What does a Balance Sheet show (that a Profit & Loss does not)
 * The value of a firm at a point in time.** This can be found in the Net Assets Employed figure. That's not to say that if the N.A.E. is $2million then the firm can expect to be purchased for a price of exactly $2 million, as you need to consider other factors such as the profitability of the firm - however it is a good indicator, and should not be sold for much less than that, even if its unprofitable, as the assets can be liquidized and $2 million obtained without the need for any further trading. A highly profitable firm could of course be expected to fetch a price of eg $3 million as not only do they have high valued assets but in this case they //use them// productively.
 * The sources of finance used.** This can be very important for a potential investor. If that $2million N.C.E. is largely based on sources such as Share Capital rather than Retained Profit, Debentures rather than Personal Savings then the business becomes less attractive as it already has 'obligations' to existing stakeholders. The Gearing formula is used here.
 * Liquidity / Working Capital.** This is measured by the formulae 'Current Assets - Current Liabilities' and shows how easily a firm can pay off its short term debts. In medical terminology, the firm may have a healthy heart, stable blood pressure, good cholesterol level (ie good signs for long term health) but has it the ability to avoid the on-coming train (ie what is its short term health like). A more specific example : a firm may own assets worth thousand of dollars, but can it pay its electricity bill which arrived in the post this morning. Because if it can't the power will be cut off, production will stop and revenue will dry up, and all the fixed assets (eg modern building, great machinery etc) won't be of any productive purpose.

Youtube Video Tutorial on 'How To Read A Balance Sheet'. media type="youtube" key="0iToYAnGKwc" height="315" width="420" //It short and simple, so useful in that respect but it's imperfect. Highlights the fact that the structure and terminology of all Final Accounts can change slightly from country to country (or from author to author). In this video the narrator introduces a third type of 'Asset' which we don't need to know for IB, and finishes with the formula 'Assets = Liabilities + Stockholder Equity' which is not wrong, but it is unfamiliar. IB say 'Assets - Liability = Stockholder Equity' or more detailed [ 'Assets - Liabilities = Net Assets Employed'] = [ Net Capital Employed]//

__Depreciation__ : If we purchase a machinery that costs $5000 in October 21st 2005, our Balance Sheet would change from October 20th (eg Current Assets of Cash = $5000 & Fixed Assets of Machinery = $0) to October 22nd (eg Current Assets of Cash = $0 & Fixed Assets of Machinery = $5000). But what about a year later, 22nd October 2006, is that machine still worth $5000? Chances are it has lost value, ie depreciated, and an accurate Balance Sheet must reflect that. __Stock Control__ : We buy 100 bricks at $1 each on 1st January (in the New Year Sales) and we'll call these BricksA. Then we realize we need more and go buy another 50 on the 10th January, but now at a cost of $1.50 because the Sales Offer is over. We'll call these BricksB. On the 11th January our Balance Sheet will show (Current Assets of Stock = $100 + $75). Easy. On January 12th we use 120 bricks, leaving 30 in stock - what does our Balance Sheet show now? The answer is : //it depends what bricks we used//. If we used 100 of BrickA + 20 of BrickB, then we have 30 BrickBs left and (Current Assets of Stock = $45), but if we used 70 of BrickA and 50 of BrickBs then we will still have 30 BricksAs left of course, but a different value in our Balance Sheet of (Current Assets of Stock = $30).
 * Linked to the accurate creation of a Balance Sheet, are 2 ideas

Resources used for more info: