the balance sheet fred wenstøp. 2 assets things owned by the business 100 liabilities amounts owed...
TRANSCRIPT
The balance sheet
Fred Wenstøp
Fred Wenstøp 2
Assets
Things owned by the
business
100
Liabilities
Amounts owed by the
business
100
Assets
Where money is
spent
100
Liabilities
Where money is obtained
100
Two perspectives on the balance sheet
Traditional perspective Sources and uses of funds
Fred Wenstøp 3
Structure of the balance sheet
Fixed assets
(FA)
Current assets
(CA)
Assets
100
Owners’ funds
(OF)
Long-term loans
(LTL)
Current liabilities
(CL)
Liabilities
100
Fred Wenstøp 4
Current assets
Short term assets that can be converted to cash quicklyinventories
accounts receivable (trade debtors)
cash and cash equivalents
miscellaneous• pre-payments to suppliers
Fixed assets
(FA)
Current assets
(CA)
Assets
100
Owners’ funds (OF)
Long-term loans (LTL)
Current liabilities (CL)
Liabilities
100
Fred Wenstøp 5
Fixed assets
All long term assetsIntangibles
• Goodwill, patents, licences
Net fixed assets• Land and buildings• plant and equipment• transport• computers• office equipment
Long term investments• Shares in associated
companies
Fixed assets
(FA)
Current assets
(CA)
Assets
100
Owners’ funds (OF)
Long-term loans (LTL)
Current liabilities (CL)
Liabilities
100
Fred Wenstøp 6
Current liabilities
Short term liabilities to be paid within one yearAccount payable (creditors)
Short term loans• Bank overdrafts
• Interst bearing short term debts
Miscellaneous• Accrued payments
• interests
• current tax
• dividends due
Fixed assets
(FA)
Current assets
(CA)
Assets
100
Owners’ funds (OF)
Long-term loans (LTL)
Current liabilities (CL)
Liabilities
100
Fred Wenstøp 7
Long-term loans
All long-term loans more than one year Fixed assets
(FA)
Current assets
(CA)
Assets
100
Owners’ funds (OF)
Long-term loans (LTL)
Current liabilities (CL)
Liabilities
100
Fred Wenstøp 8
Owners’ funds
All claims by the owners on the businessIssued common stock
Capital reserves• Surplus from sources other
than normal trading that cannot be distributed
Revenue reserves• Surplus from trading. Can
be distributed as dividends, but not often used for that
Fixed assets
(FA)
Current assets
(CA)
Assets
100
Owners’ funds (OF)
Long-term loans (LTL)
Current liabilities (CL)
Liabilities
100
Fred Wenstøp 9
Common terms
Total assetsTA = FA + CA
Capital employedCE = FA + CA -CL
CE = OF + LTL
Net WorthNW = FA + CA - CL - LTL
NW = OF
Working capital (liquidity)WC = CA - CL
Fixed assets
(FA)
Current assets
(CA)
Assets
100
Owners’ funds (OF)
Long-term loans (LTL)
Current liabilities (CL)
Liabilities
100
Fred Wenstøp 10
Profit and loss account
Sales 112Operating costs 100
PBIT Profit before interest and tax 12less interest 2
PBT Profit before tax 10less tax 3
PAT Profit after tax 7less dividends 2
RE Retained earnings 5
Fred Wenstøp 11
Return on investment
ROTA = PBIT/TAReturn on total assets
• Shows how well management uses all the assets in the business to generate an operating surplus
ROE = PAT/OFReturn on equity
• Absolute return delivered to shareholders• High ROE leads to a high share price
ROCE = PBIT/(OF + LTL)Return on capital employed