INTRODUCING THE BALANCE SHEET · 2015. 11. 27. · PURPOSE OF BALANCE SHEETS A balance sheet shows:...
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EXECUTIVE EDUCATION INTRODUCING THE BALANCE SHEET ARJEN MULDER
Transcript of INTRODUCING THE BALANCE SHEET · 2015. 11. 27. · PURPOSE OF BALANCE SHEETS A balance sheet shows:...
EXECUTIVE EDUCATION
INTRODUCING THEBALANCE SHEETARJEN MULDER
EXPLANATION OF THE TOPIC
• This video will familiarise you with the concept of a‘balance sheet’, by showing:
1. What is the purpose of a balance sheet?
2. What do the elements represent?
3. Why should you, as a non-financial manager, care?
PURPOSE OF BALANCE SHEETS
• A balance sheet shows:
• What a firm owns (‘assets’),
• What it owes (‘liabilities’) to its creditors,
• The value of the business to the owners (‘shareholderequity’),
all at a specific moment in time.
• Since the snapshot information is not necessarilyinformative, the balance sheet usually also shows thedata of the previous year. Together, we can not onlyinfer whether a firm has done well over the past year,but also whether it has improved or not.
WHY SHOULD A NON-FINANCIAL MANAGER KNOW THIS?
• Analysts use balance sheet information to:
• Forecast whether a firm can pay its bills,
• Analyse how much money the owners have put intothe firm.
• This is called ‘financial statement analysis’. In classwe will practise how to do that.
• To derive useful information from a balance sheet, aminimum working knowledge is required.
WHAT IS A BALANCE SHEET?
• Consider the following typical balance sheet.
FnF Labs, thousands
Assets e Liabilities and Owners’ Equity e
Cash and cash equivalents 100 Short-term borrowings 50
Short-term financial assets 140 Accounts payable 120
Accounts receivables 250 Income taxes 70
Inventories 500 Accrued liabilities and provisions 240
Other current assets 10 Other current liabilities 20
Total current assets 1,000 Total current liabilities 500
Property, Plant, and Equipment 1,700 Corporate bonds 750
Patents 100 Long-term bank loans 420
Goodwill 200 Leasing obligations 430
Total non-current assets 2,000 Long-term liabilities 1,600
Owners’ Equity 900
Total Assets 3,000 Total Liabilities and O.E. 3,000
SOME DETAILS OF A BALANCE SHEET (1)
BALANCE SHEET EXAMPLE
Assets e Liabilities and Owners’ Equity e
Current assets 1,000 Current liabilities 500
Non-current assets 2,000 Long-term liabilities 1,600
Owners’ Equity 900
Total Assets 3,000 Total Liabilities & O.E. 3,000
• Let us explore the various categories and start offwith the current assets.
SOME DETAILS OF A BALANCE SHEET
BALANCE SHEET EXAMPLE: CURRENT ASSETS
Assets e Liabilities and Owners’ Equity e
Current assets 1,000 Current liabilities 500
• Cash and cash equivalents 100 Long-term liabilities 1,600
• Short-term financial assets 140 Owners’ Equity 900
• Accounts receivables 250
• Inventories 500
• Other current assets 10
Non-current assets 2,000
Total Assets 3,000 Total Liabilities & O.E. 3,000
• We assume some assets can be easily convertedinto cash. We call these assets ‘Current assets’.
• Examples of current assets include cash and cashequivalents, short-term investments, accountsreceivables, stock of inventory, prepaid expenditures,etc.
• Let us now turn to the non-current assets.
SOME DETAILS OF A BALANCE SHEET
BALANCE SHEET EXAMPLE: NON-CURRENT ASSETS
Assets e Liabilities and Owners’ Equity e
Current assets 1,000 Current liabilities 500
Non-current assets 2,000 Long-term liabilities 1,600
• Property, Plant, and Equipment 1,700 Owners’ Equity 900
• Patents 100
• Goodwill 200
Total Assets 3,000 Total Liabilities & O.E. 3,000
• We assume non-current assets cannot be easilyconverted into cash.
• Examples of non-current assets include tangibleassets (e.g. PPE), and intangible assets (e.g. patentsand goodwill).
• Let us now turn to current liabilities.
SOME DETAILS OF A BALANCE SHEET
BALANCE SHEET EXAMPLE: CURRENT LIABILITIES
Assets e Liabilities and Owners’ Equity e
Current assets 1,000 Current liabilities 500
Non-current assets 2,000 • Short-term borrowings 50
• Accounts payable 120
• Income taxes 70
• Accrued liabilities and provisions 240
• Other current liabilities 20
Long-term liabilities 1,600
Owners’ Equity 900
Total Assets 3,000 Total Liabilities & O.E. 3,000
• We assume current liabilities are expected to besettled into cash within one year.
• Examples of current liabilities include accountspayable, accrued expenditures, and short-term debt.
• Let us now turn to long-term debt.
SOME DETAILS OF A BALANCE SHEET
BALANCE SHEET EXAMPLE: LONG-TERM DEBT
Assets e Liabilities and Owners’ Equity e
Current assets 1,000 Current liabilities 500
Non-current assets 2,000 Long-term liabilities 1,600
• Corporate bonds 750
• Long-term bank loans 420
• Leasing obligations 430
Owners’ Equity 900
Total Assets 3,000 Total Liabilities & O.E. 3,000
• We assume long-term liabilities are expected to bedue in a period longer than one year.
• Examples long-term liabilities include corporatebonds, long-term bank loans (incl. mortgages), andleasing obligations.
• Let us now finally turn to owners’ equity.
SOME DETAILS OF A BALANCE SHEET
BALANCE SHEET EXAMPLE: OWNERS’ EQUITY
Assets e Liabilities and Owners’ Equity e
Current assets 1,000 Current liabilities 500
Non-current assets 2,000 Long-term liabilities 1,600
Owners’ Equity 900
• Paid-in capital 550
• Acc. retained earnings 220
• Reserves 130
Total Assets 3,000 Total Liabilities & O.E. 3,000
• The owners’ equity is the remaining interest in thecompany, if we subtract all liabilities from total assets.
• It consists of a cash, and a non-cash component.
SUMMARY
• In this video we have had a close look at the balancesheet.
• The purpose of this video was to familiarise you withthe balance sheet, as a preparation for your ‘Financefor Non-Financial Managers’ course.
