THE BALANCE SHEET Also called ‘Statement of Financial Position Before looking at the Balance Sheet for Businesses we will recap at similar ideas for individuals Create definitions of the following terms:- Assets Liabilities Learning Outcomes Describe the parts of the Balance Sheet. Explain two problems highlighted in Balance Sheet.

This is Dave He owns a house worth $1.2 million. Class discussion: Is Dave a millionaire? Dave has a mortgage of $500,000 Question: How much of the house does Dave actually own?

Group Discussion: What does the following picture show?

Equity = Assets minus liabilities. Commonly defined as all that you own less all that you owe. Equity can also be called Capital or Net Assets. Equity is a similar concept to Net Worth – but applied to businesses not people Copy the Blue Notes

This is Julie

Julie Barker’s Assets and Liabilities as at 30 June 2015 Net Assets (A-L) Assets Current Non Current Liabilities $ Household appliances 4,000 Loan from mum (due next week) 500 Jewellery 6,900 Mortgage (due 2025) 106,000 Farmers store card account 3,000 Furniture 18,000 Bank Account 1,100 Credit card debt (due end of month) 1,300 Food in cupboard 3,300 Hire purchase on car (due 2018) 19,000 House 165,000 Car 27,000 Copy the Diagram Activity Classify the list as either Assets or Liabilities

Assets and Liabilities What a business (or person) owns These are called assets E.g. ? Two types:- Current – Will be owned for less than a year Non Current – will be owned for more than a year. E.g. Fixed Assets Most businesses (and people) owe money or services to other people or institutions such as banks These are called liabilities E.g. ? Two Types:- Current – Must be paid in the next year or Non Current – Will be paid in full in more than a year. Copy the Blue Notes

Equity = Assets - Liabilities Non Current Liabilities The accounting equation is now stated as:- Equity = Assets - Liabilities Current Liabilities & Non Current Liabilities Current Assets & Non Current Assets Copy the Blue Notes

Current Assets less Current Liabilities. Working Capital Current Assets less Current Liabilities. The “cash” available for day-to-day operations. It's used to pay bills. Activity: Imagine Julie was a business - Calculate her Working Capital. Is this situation a problem? CA – CL = WC Cash Flow Problem - When a business/ person does not have enough current assets to meet their current liabilities. Working Capital is low or even negative. Activity: Solving Cash Flow Problems – Activity Sheet.

Balance Sheet as at 31 March 2… $ Current assets (list) xx (Business Name) Balance Sheet as at 31 March 2…   $ Current assets (list) xx Non-current assets Total assets Less Liabilities Current liabilities Non-current liabilities Total liabilities Net assets A-L Equity Balance Sheet: To measure assets, liabilities at a point in time

John Bite, owner of a music retail store called Dig Music, has recorded the items below for the year ending December 31, 2020. Item ($ 000s) Inventory 40 Vehicles 80 Shop Premises 150 Mortgage 130 Creditors 20 Debtors 15 Long-term loan 50 Cash at Bank 5 Activity: Produce the Balance Sheet for December 2020 and calculate the Owner’s Equity. Analysis Questions:- Calculate John’s working capital. Is it safe? Calculate the percentage of the business that is owned by John

Balance Sheet as at 31 December 2020 Dig Music Balance Sheet as at 31 December 2020   $ 000's Current assets Cash at Bank 5 Inventory 40 Accounts receivable (debtors) 15 60 Non-current assets Vehicles 80 Shop Premises 150 230 Total assets 290 Less Liabilities Current liabilities Accounts payable (creditors) 20 Non-current liabilities Long-term loan 50 Mortgage 130 180 Total liabilities 200 Net assets 90 Equity ANSWER

High Gearing – A problem Gearing measures the proportion of a firm's assets are funded by owner's funds versus liabilities. If the proportion is high (Above 50%) – it is termed high gearing. This is considered risky. A business with high gearing is more vulnerable to a decrease in sales because the company must continue to:- Pay Interest on its debts and Repay its debts even though limited revenue is coming in. A greater proportion of equity provides a cushion to protect the business. Solution to this problem Owner invests more funds to repay liabilities – this will increase equity. Stop taking profits out of the business – This will mean assets can be funded by business cash rather than liabilities . Activity - Over two thirds of Dig records has been funded by liabilities – is this a problem?

Learning Review Activity – What have you learned? What are the five main parts of a balance sheet? Which two problems highlighted in Balance Sheet? Give two solutions to each problem?