Transcript The Profit and Loss Statement

The Balance Sheet
Lecture 2
This lecture is part of Chapter 1:
The Basic Financial Statements
Today’s Lecture
Understand the elements of the Balance Sheet
Use MS Excel to make a simple Balance Sheet
Elements of a Balance Sheet
A balance sheet, also called the statement of financial
position, lists:
$ IN
• Assets
$ OUT
• Liabilities
?
• Owners Equity
as of a specific date. It gives an idea of what the company is
worth.
Let us now look at these terms in more detail.
Elements of a Balance Sheet
Assets
$ IN
Assets are all those things a company owns which are of
value to the business.
Assets can be tangible like e.g. a manufacturing plant,
computers or cash in the bank.
Tangible assets like cash or goods for sale that can
easily (i.e. within an accounting year) be converted
into cash are called current assets while other assets
like properties and equipment are called fixed assets.
Assets can also be intangible like e.g. copyrights.
Elements of a Balance Sheet
Liabilities
$ OUT
Liabilities are all those things for which the company
eventually needs to pay. There are two types of liabilities:
Current Liabilities need to be paid within one
accounting year. Examples are: Outstanding rent,
goods bought on credit.
Long Term Liabilities are those liabilities which will
not be paid during the current accounting year.
Examples are: Long term debts, bank loans.
Elements of a Balance Sheet
Owner’s Equity
?
Owner’s Equity is by definition the difference between the
Assets of a company and its Liabilities. Owner’s Equity is
the sum of two parts:
Contributed Capital is the money that the owners
invested in the company.
Retained Earnings are those earnings which were not
distributed to the owners. These can accumulate to a
large sum over the years.
Elements of a Balance Sheet
Let me stress again: A Balance Sheet must balance the
assets, liabilities and owner’s equity.
Assets – Liabilities = Owner’s Equity
$ IN
$ OUT
Most commonly, the assets are on top and the liabilities
and owner’s equity on the bottom.
Let’s now have a look at a balance sheet.
A Simple Balance Sheet
Beam Me
Up
Scottie!
A
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
B
C
D
E
F
G
Golden Win Double Dragon International
Balance Sheet
Assets
Cash and Equivalents
Accounts Receivable
Inventory
Total Current Assets
Plant and Equipment
Accumulated Depreciation
Net fixed assets
Total Assets
Liabilities and Owner's Equity
Accounts Payable
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Total Shareholder's Equity
Total Liabilities and owner's Equity
10000
1200
8300
19500 
800
500
300 
19800 
7600
900
8500
1200
9700
6000
4100
10100
19800
=G7+G8+G9
=G11-G12
=G10+G13

=G16+G17

=G18+G19


=G21+G22
=G20+G23
Cheer Up!
Let’s first
clean this up
a bit …
and then
look at it in
more detail
…
A Simple Balance Sheet
C
D
E
F
Beam Me 2 A B
3
Golden Win Double Dragon International
Up
4
Balance Sheet
Scottie! 5
6
Assets
Is that what
you
call simple????
7
Cash and Equivalents
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
Accounts Receivable
Inventory
Total Current Assets
Plant and Equipment
Accumulated Depreciation
Net fixed assets
Total Assets
Liabilities and Owner's Equity
Accounts Payable
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Total Shareholder's Equity
Total Liabilities and owner's Equity
G
10000
1200
8300
19500 
800
500
300 
19800 
As often, the scientific method can come in handy=G7+G8+G9
here.
To paraphrase: Divide and Conquer!
Cheer Up!
Or: Look at things bit by bit, present them clearly=G11-G12
and
=G10+G13
understand…
7600
900
8500
1200
9700
6000
4100
10100
19800
 a different
=G16+G17
(Still feel like drowning? I should have chosen

=G18+G19
background!)


=G21+G22
=G20+G23
Let’s first
clean this up
a bit …
and then
look at it in
more detail
…
A Simple Balance Sheet
A
3
4
5
B
C
D
E
F
G
Use the
Center and
Merge Button
Change the
Font
Golden Win Double Dragon International
Balance Sheet, As of Dec 31 2000
6
7
8
9
10
11
12
13
14
Assets
Cash and Equivalents
Accounts Receivable
Inventory
Total Current Assets
Plant and Equipment
Accumulated Depreciation
Net fixed assets
Total Assets
10000
1200
8300
19500 
800
500
300 
19800 
15
16
17
18
19
20
21
22
23
24
Liabilities and Owner's Equity
Accounts Payable
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Total Shareholder's Equity
Total Liabilities and owner's Equity
7600
900
8500
1200
9700
6000
4100
10100
19800
=G7+G8+G9
=G11-G12
=G10+G13

=G16+G17

=G18+G19


=G21+G22
=G20+G23
Underline
before the
subtotals
Make the
totals bold
Make the
main items
italic
Some Notes
Note how the top and bottom parts balance
Presentation indeed makes a big difference. In a sense
‘design’ is an important ingredient of financial modeling.
After all, what is the use of great information if no-one
understands it?
Now, let us look at the items in the balance sheet one by one.
Elements of a Balance Sheet
Assets – Current Assets
$ IN
Cash and Cash Equivalents
Cash is all the cash the company has, be it in bank accounts or in the
cash box. Cash Equivalents are short term investments that can be
converted to cash with no or very little delay. Examples of Cash
Equivalents are: Money Market Investments, Government Bonds.
Accounts Receivable
Most businesses do not immediately receive payment for (some or
all) of the goods or services they sell. Assuming that payment will
indeed be made in the near future, a receivable account is an asset.
Elements of a Balance Sheet
Assets:Total Current Assets
In this case, of course, its just the sum of ‘Cash and
Equivalents’ and ‘Accounts Receivable’, but there could
be many more ‘current’ items.
Total current assets is an important item since it indicates
how much money the company has to run its business.
Elements of a Balance Sheet
Assets: Fixed Assets
Plant and Equipment
In order to run a business one usually will need to buy some equipment (even when one is in the service business) like e.g. machines
and computers. The total cost price of the bought equipment is listed
in this item (note, the fact that equipment becomes worth less is
accounted for in the next item).
Accumulated Depreciation
Naturally, when one uses equipment it will get old and thus become
worth less. It is therefore necessary to subtract a certain amount
from the original equipment value every year. Since one would like
to keep the original value listed above, one needs to ‘accumulate’
i.e. sum up all the previous year’s depreciations.
Elements of a Balance Sheet
Assets: Net Fixed Assets
In this case the net fixed assets are ‘Plant and Equipment’
minus ‘Accumulated Depreciation’, but there could be
many more items.
Note that having a lot of fixed assets does not necessarily
mean that the company is ‘rich’. It is also important to
realize that fixed assets do not provide cash for running the
business (though they could be use as collateral for a
loan).
Elements of a Balance Sheet
Assets: Total Assets
Total Assets = Current Assets + Net Fixed Assets
Note: While total assets in a sense represent the current
value of the business, they do not necessarily represent the
resale value or the liquidation value of the business.
The total assets are the value of the business as seem from
the perspective of a continuation of the currently operating
business.
Elements of a Balance Sheet
Liabilities: Current Liabilities
$ OUT
• Accounts Payable
Just as there are accounts receivable, there are also accounts
payable. Businesses usually do not need to pay immediately upon
delivery but have e.g. 30 or 60 days ‘credit-terms’.
In other words, ‘accounts payable’ are unpaid bills due soon.
• Other Current Liabilities
All the liabilities which are due within one accounting year and
which are not separately listed (in this case only accounts payable)
are lumped together here. Examples are: unpaid salaries, interest,
short term loans.
Elements of a Balance Sheet
Liabilities: Total Current Liabilities
The total current liabilities are an important indicator of
how much money a company will need in the near future.
If the total current liabilities are much bigger than the total
current assets great caution is warranted.
Elements of a Balance Sheet
Liabilities: Long Term Liabilities
• Long Term Debt
While in daily life having debts (especially credit card debts!) is
usually not a good thing, the proper use of long term loans is an
essential part of many business activities. It is for example very
rare that a company has enough cash to build a new state of the art
manufacturing plant. The idea is of course that you earn more than
you pay in interest. (This is somewhat similar to buying a condo
with a mortgage).
• Other Long Term Liabilities
All other liabilities which do not need to be returned within one
accounting year and which are not separately listed. E.g. Royalties,
asbestos claims.
Elements of a Balance Sheet
Liabilities: Total Liabilities
Total Liabilities = Total Current + Long Term Liabilities
Note: If the Total Liabilities exceed the Total Assets, the
company is almost certainly in some sort of danger. But
there are exceptions to this! (Especially companies in new
hot industries like e.g. dot.coms or genetics).
Elements of a Balance Sheet
Liabilities: Shareholder’s Equity
• Common Stock
When a corporation is set up or when it needs money and desires to
do so, it can issue common stock. The amount received is entered
under this item. Note that the value printed on the stock certificate
may be quite different from what one actually pays.
• Retained Earnings
At the end of an accounting year, a company can have a profit or
a loss. The profit or loss (in case of loss, naturally with a minus
sign) is added to the retained earnings.
The retained earnings sum up all the profits and losses since the
inception of the company (minus paid out dividends).
Elements of a Balance Sheet
Liabilities: Total Shareholder’s Equity
This is the amount the company ‘owes’ its shareholders.
Note that from an operational point of view, these debts
have no impact on the daily running of the business since
they do not need to be repaid.
Elements of a Balance Sheet
Liabilities: Total Liabilities and Owner’s
Equity
As such this item is mainly a cross check for the accuracy
of the balance sheet. It must be exactly the same number
as the total assets or something is wrong!
A Simple Balance Sheet
A
3
4
5
Same
B
C
D
E
F
G
Golden Win Double Dragon International
Balance Sheet, As of Dec 31 2000
6
7
8
9
10
11
12
13
14
Assets
Cash and Equivalents
Accounts Receivable
Inventory
Total Current Assets
Plant and Equipment
Accumulated Depreciation
Net fixed assets
Total Assets
10000
1200
8300
19500 
800
500
300 
19800 
15
16
17
18
19
20
21
22
23
24
Liabilities and Owner's Equity
Accounts Payable
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Total Shareholder's Equity
Total Liabilities and owner's Equity
7600
900
8500
1200
9700
6000
4100
10100
19800
It’s a Balance Sheet
May be, it’s
quite simple
after all!
=G7+G8+G9
=G11-G12
=G10+G13

=G16+G17

=G18+G19


=G21+G22
=G20+G23
A Simple Balance Sheet
A
3
4
5
B
C
D
E
F
G
Golden Win Double Dragon International
Balance Sheet, As of Dec 31 2000
6
7
8
9
10
11
12
13
14
Assets
Cash and Equivalents
Accounts Receivable
Inventory
Total Current Assets
Plant and Equipment
Accumulated Depreciation
Net fixed assets
Total Assets
10000
1200
8300
19500 
800
500
300 
19800 
15
16
17
18
19
20
21
22
23
24
Liabilities and Owner's Equity
Accounts Payable
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Total Shareholder's Equity
Total Liabilities and owner's Equity
7600
900
8500
1200
9700
6000
4100
10100
19800
Sum
Equals
May be, it’s
quite simple
after all!
=G7+G8+G9
=G11-G12
=G10+G13

=G16+G17

=G18+G19


=G21+G22
=G20+G23
A Simple Balance Sheet
A
3
4
5
B
C
D
E
F
G
Golden Win Double Dragon International
Balance Sheet, As of Dec 31 2000
6
7
8
9
10
11
12
13
14
Assets
Cash and Equivalents
Accounts Receivable
Inventory
Total Current Assets
Plant and Equipment
Accumulated Depreciation
Net fixed assets
Total Assets
10000
1200
8300
19500 
800
500
300 
19800 
15
16
17
18
19
20
21
22
23
24
Liabilities and Owner's Equity
Accounts Payable
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Total Shareholder's Equity
Total Liabilities and owner's Equity
7600
900
8500
1200
9700
6000
4100
10100
19800
Sum
Equals
May be, it’s
quite simple
after all!
=G7+G8+G9
=G11-G12
=G10+G13

=G16+G17

=G18+G19


=G21+G22
=G20+G23
A Simple Balance Sheet
A
3
4
5
6
7
8
9
10
11
12
13
14
Sum
Equals
15
16
17
18
19
20
21
22
23
24
B
C
D
E
F
G
Golden Win Double Dragon International
Balance Sheet, As of Dec 31 2000
Assets
Cash and Equivalents
Accounts Receivable
Inventory
Total Current Assets
Plant and Equipment
Accumulated Depreciation
Net fixed assets
Total Assets
10000
1200
8300
19500 
800
500
300 
19800 
Liabilities and Owner's Equity
Accounts Payable
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Total Shareholder's Equity
Total Liabilities and owner's Equity
7600
900
8500
1200
9700
6000
4100
10100
19800
May be, it’s
quite simple
after all!
=G7+G8+G9
=G11-G12
=G10+G13

=G16+G17

=G18+G19


=G21+G22
=G20+G23
A Simple Balance Sheet
A
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
B
C
D
E
F
G
Golden Win Double Dragon International
Balance Sheet, As of Dec 31 2000
Assets
Hey!
Cash and Equivalents
10000
ThisAccounts
is likeReceivable
in Ally McBeal. 1200
Inventory
Total Current Assets
Plant and Equipment
Accumulated Depreciation
Net fixed assets
Total Assets
8300
19500 
800
500
300 
19800 
Accounts Payable
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Total Shareholder's Equity
Total Liabilities and owner's Equity
7600
900
8500
1200
9700
6000
4100
10100
19800
Sum …. Equals
Sum …. Equals
Sum
….andEquals
Liabilities
Owner's Equity

We should start singing a song. Any

good rappers around?


=G7+G8+G9
=G11-G12
=G10+G13
=G16+G17
=G18+G19
=G21+G22
=G20+G23
A Simple Balance Sheet
A
B
E
F
G
Balance Sheet, As of Dec 31 2000
Assets
Cash and Equivalents
Accounts Receivable
Inventory
Total Current Assets
Plant and Equipment
Accumulated Depreciation
Net fixed assets
Total Assets
Sum
15
16
17
18
19
20
21
22
23
24
D
Golden Win Double Dragon International
3
4
5
6
7
8
9
10
11
12
13
14
C
Liabilities and Owner's Equity
Accounts Payable
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Total Liabilities
Common Stock
Retained Earnings
Total Shareholder's Equity
Total Liabilities and owner's Equity
Equals
10000
1200
8300
19500 
800
500
300 
19800 
7600
900
8500
1200
9700
6000
4100
10100
19800
Guess what:
The liabilities side
is the same.
=G7+G8+G9
=G11-G12
=G10+G13

=G16+G17


=G21+G22
=G20+G23
I think you’ll get the

=G18+G19
picture
…
Key Points of the Day
The Balance Sheet provides a snapshot of the assets and
liabilities of a company.
The Balance Sheet is one of the most important financial
statements.
Remember:
Assets – Liabilities = Owner’s Equity
$ IN
$ OUT
And again:
Assets – Liabilities = Owner’s Equity