Balance sheet
• Balance Sheet: Shows what a firm owns, what it owes and the value of the capital invested in the business at a point in time
• i.e. A statement of a firm’s value on a certain date
• Constituents:– Assets– Liabilities– Capital
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Balance sheetassets
• Assets: What the business owns:– Fixed assets: Assets that will be held for
more than one year– Current assets: Held for less than one year– Trade debtors: Customers who have bought
goods on credit and owe money
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Balance sheetliabilities
• Liabilities: What the business owes– Current liabilities: Due to be paid in less
than one year– Trade creditors: Suppliers to whom the
business owes money– Long-term liabilities: Due to be paid in more
than one year
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Balance sheetcapital
• Capital: What the business owes its owners• Share capital: Invested in the business by its
shareholders• Retained profit: Profit that has been
accumulated over previous years
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Balance sheetthe accounting equation
• The balance sheet is based around the principle that:
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Shareholders’ funds(capital)Assets Liabilities =–
Balance sheetexample
• I start up in business with:– £100 of share capital – a £50 long term loan
• I buy:– a building for £90– a van for £20 – £30 of stock, for which
I pay cash of £10 and have a month’s credit for the remainder
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£100
£100
£150
£150
(100 + 50)(100 + 50 - 90)(100 + 50 - 90 - 20)(100 + 50 - 90 - 20 - 10)
Fixed Assets:BuildingsVan
Current Assets:StockCash
Less: Current liabilities:Trade creditors
Net Current AssetsAssets employed
Financed by:Share capitalBank loan
Capital employed
£
Tesco plc balance sheetat 25 February 2008
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Fixed assetsLand and buildings 16,930Equipment and vehicles 2,857
Intangible assets
23,864Current assets
Stocks 2,430Debtors 1,311Cash
Less: Current liabilitiesCreditors 7,277Bank overdraft 10,263
Net Current Liabilities (3,963)
Assets Employed
Financed by:Share capital 4,904Retained profit 6,998Bank loans
Capital Employed
£’000 £’000 £’000
4,077
2,559 6,300
2,986
19,901
7,999
19,901
Balance sheettask – Tesco plc balance sheet
• What sort of fixed assets do Tesco have?• Who might be their creditors?• Who might be their debtors?
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Balance sheetTOP TIP (1)
• A balance sheet must always balance– If it doesn’t, there’s a mistake
• The balance sheet lists assets in reverse order of liquidity– Fixed assets first (freehold land is the least
liquid asset)– Current assets last (cash is the most liquid
asset)• Net current assets
= Current assets – Current liabilities= Also called working capital– Positive working capital is important for good
cashflow
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Balance sheetTOP TIP (2)
• The top half of the balance sheet shows where the capital invested in the business is currently spent (assets employed)
• The bottom half of the balance sheet shows the long term sources of funds for the business (capital employed)
• As the business grows, retained profit is added to the capital employed– It is part of the capital as it ultimately belongs
to the shareholders
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Capital and revenue expenditure
• Capital expenditure: Spending on new fixed assets
• Revenue expenditure: Expenditure on all other costs
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Capital and revenue expenditureshort task
• For each of the items of expenditure below, indicate whether it is capital or revenue expenditure:
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Capital expenditure
Revenue expenditure
Advertising
MachineryRaw materialsPowerComputersOffice salariesSecond-hand ferryTelephone bill
Balance sheetssummary questions (1)
• For each of the questions below, indicate where the answer can be found:
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What was the gross profit?
What dividends did we pay shareholders?
What is the total value of current assets?
Trading and Profit & Loss Account
Appropriation Account
Balance Sheet
Balance sheetssummary questions (2)
• For each of the questions below, indicate where the answer can be found:
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What expenses did we incur last year?
What was our net profit?
What is our capital employed?
Trading and Profit & Loss Account
Appropriation Account
Balance Sheet
TaskOllie’s Fine Foods Ltd
• The following balance sheet (next slide) is for Ollie’s Fine Foods Ltd, a retailer of locally grown organic foods
• The figures are for 2005 (shortened balance sheet)
• Questions– In what way is the balance sheet shortened?– State two likely fixed assets that Ollie, as an organic food
retailer, might have– Use the following figures to create an extract of the balance
sheet at 31 July 2006• Fixed assets: £139,000• Stock: £4,700• Debtors: £19,000• Cash: £2,100• Creditors: £18,700• Overdraft: £3,400
– Use the balance sheets to compare Ollie’s Fine Foods Ltd’s performance
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Ollie’s Fine Foods Ltdbalance sheets as at 31 July
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2005 2006
£’000 £’000 £’000 £’000
Fixed assets 142,500
Current assets
Stock 5,400
Debtors 14,600
Cash 6,300
26,300
Current liabilities
Creditors 11,200
Overdraft 1,100
(12,300)
Net current assets 14,000
Net assets employed 156,500
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