Finanacial Statements Balance Sheet & Profit and Loss Account

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

Balance Sheet Income Statement Statement of Cash Flows and a newer one -- Statement of Owner Equity Four Basic Financial statements:

Balance Sheet Purpose Determines solvency of business- ability to meet both long term and short term obligations Gives concise summary of firm’s resources and obligations Gives a measure of firm’s 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 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

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 Balance Sheet Debt Types

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

Take out a Piece of Paper Draw some lines and label like this :

What is the Balance Sheet? Picture in time -- a specific point, as in XX. 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 Market Value basis - Total Liabilities inc. Contingent Liabilities - Retained Earnings (contributed Capital)

Profit and Loss Account It is a report of a firm’s 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 firm’s revenue and expenses Measures firm’s 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