GCSE Business Finance - Balance Sheets (Part 1). Learning Objective To understand what a balance...
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Transcript of GCSE Business Finance - Balance Sheets (Part 1). Learning Objective To understand what a balance...
GCSE Business
Finance - Balance Sheets (Part 1)
Learning Objective
To understand what a balance sheet is.
Balance Sheet
The balance sheet is a record of a business assets and liabilities.
Like a P/L account it is a record of what has
happened.
Qs What are assets?
Qs What are liabilities
Assets These are what the
business owns
Liabilities This is what the business
owes.
The Balance Sheet There are 2 parts to a balance sheet:
The Top Half
This shows what the business has done with
its money.
It is called NET ASSETS. (This is what the
business is worth)
The Bottom Half
This shows where all the money that the business
has used came from.
It usually comes from shareholders, retained
profit and loans.
It is often called CAPITAL EMPLOYED.
£ £
Fixed Assets
Premises 60,000
Equipment 14,000
Current Assets
Stocks 2,000
Debtors 5,000
Cash at Bank 5,000
Current Liabilities
Overdraft 3,000
Creditors 3,000
Working Capital
Net Assets
Financed by:
Owners Capital 40,000
Long Term Liability (Loan) 40,000
Capital Employed
The top part looks at …
Net Assets
The bottom part looks at …
Capital Employed
Key Words
Fixed assets (tangible and intangible assets) Current assets Current liabilities Long term liabilities Net Assets Capital Employed
What do these key terms mean?
We also need to know what the
phrase working capital means.
We also need to know what the
phrase working capital means.
Fixed Assets Current Assets Current Liabilities
Long Term Liabilities Net Assets Capital Employed
These are assets that are owned by a business which it
uses over a long period of time (such as buildings and machinery). It can include
assets that are tangible and intangible assets.
What's the difference?
This is money that the business owes and will have
to pay in more than 12 months time. This can includes long-term loans and mortgages.
This is the long term and permanent capital of the
business.
It is calculated using the formula:
Shareholders funds/Profit + Long Term Liabilities
In finance what does the word capital mean?
This is money that the business owes that it has to pay back within the next 12
months.
For most businesses the most important liability is the money
it owes to its.
What does the word creditor mean?
This shows a business the value of all the assets it owns.
It is calculated using the formula:
fixed capital + working capital
Can you find out what working capital means?
These are the assets that the business that can easily turn into cash (it can also include cash in the bank). Examples
include stocks and any money owed to the business
(debtors).
Other Key Features: Working Capital Working capital pays
the day to day running expenses.
It is what the business owns which is either
cash or can be turned into cash.
It is calculated using the following sum:
Current assets MINUS
Current Liabilities
On the balance sheet:
Net Assets Employed = Capital Employed
Fixed Assets+
Working Capital(CA – CL)
ShareholdersFunds
+Retained Profit
+Long Term Loans
The top and the bottom must be equal … why?
Balance Sheet For Morgan’s Ladders 31st March 2012£000 £000
Fixed AssetsPremises 80Machinery 40Vehicles 30
Current AssetsStock 5Debtors 12Cash 3
Current LiabilitiesCreditors 15
Working Capital
Net Assets Employed
150
20
5
155
Add up Fixed Assets
Add up Current Assets
Working Capital = Current Assets – Current
Liabilities
Fixed Assets + Working Capital
This the top part of the BS sheet
Financed By:£000 £000
Share Capital 90Retained Profit 35Long Term LiabilitiesBank Loan 30
Add all these figures together
130
155Capital Employed
This is the 2nd part of the Balance sheet
£ £
Fixed Assets
Premises 60,000
Equipment 14,000
Current Assets
Stocks 2,000
Debtors 5,000
Cash at Bank 5,000
Current Liabilities
Overdraft 3,000
Creditors 3,000
Working Capital
Net Assets
Financed by:
Owners Capital 40,000
Long Term Liability (Loan) 40,000
Capital Employed
Lets complete a
balance sheet
Lets complete a
balance sheet
£ £
Fixed Assets
Premises 60,000
Equipment 14,000
Current Assets
Stocks 2,000
Debtors 5,000
Cash at Bank 5,000
Current Liabilities
Overdraft 3,000
Creditors 3,000
Working Capital
Net Assets
Financed by:
Owners Capital 40,000
Long Term Liability (Loan) 40,000
Capital Employed
Example 2
Example 2
£ £
Fixed Assets
Premises 60,000
Equipment 14,000
74,000
Current Assets
Stocks 2,000
Debtors 5,000
Cash at Bank 5,000
12,000
Current Liabilities
Overdraft 3,000
Creditors 3,000
6,000
Working Capital 6,000
Net Assets 80,000
Financed by:
Owners Capital 40,000
Long Term Liability (Loan) 40,000
Capital Employed 80,000
Ratio’s
What is a ratio?
A number representing a comparison between two things
Current Ratio’s
Another way to find out whether there is enough working capital is using a
CURRENT RATIO This is calculated using the following sum:
Current Ratio = Current Assets
Current Liabilities
Working Capital
Good Working Capital
Survive
Cope in a crisis
Bad Working Capital
Can’t pay day to day expenses
financial difficulties
What's the Difference
The higher the ratio of current assets to
current liabilities the higher the amount of working capital there
is.
The lower the ratio of current assets to
current liabilities the lower the amount of working capital there
is.
Activity
Qs Calculate the working capital again using using the current ratio method.
Qs What does it tell you about the businesses working capital?
The Acid Test Ratio
Stock is part of working capital.
However it might be difficult to sell stock quickly if it needed the cash.
So business use the acid ratio test.
Ratio
Acid Test ratio =
Current Assets - Stock Current Liabilities
What does it mean?
The higher the ratio the safer the business is.
Qs Calculate the Ratio for Smith’s Business
