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Lesson 2. Balance Sheet: Small details

Lesson 2. Balance Sheet: Small details. Checking homework. Making of BS. Assets and Liabilities: explanation of some items. Signs of a company’s financial stability. Differences between US and EU BS. 1. Resources and Claims View in the balance sheet. Assets = Claims on assets

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Lesson 2. Balance Sheet: Small details

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  1. Lesson 2.Balance Sheet: Small details Checking homework. Making of BS. Assets and Liabilities: explanation of some items. Signs of a company’s financial stability. Differences between US and EU BS. 1

  2. Resources and Claims Viewin the balance sheet • Assets = Claims on assets • Owners’ equity is a residual claim • Shortcomings: • Balance Sheet is not according to market or liquidating values • Owners’ equity as a claim is unclear • Claim is a legalistic view • Better suited to liquidation, not to going concern 2

  3. Sources and Use of Funds View • Left hand side = assets = how funds used or invested • Right hand side = owners’ equity +creditors = sources of funds = how assets are financed 3

  4. Account Categories • Groups of related items • Classifications of: • Assets • Equities (owners’ equity and creditors’ part) • Revenues • Expenses • Freedom to decide by executives 4

  5. Assets • Acquired in a transaction • Economic resources (provide future benefits): • Cash or convertible to cash • Goods to be sold for cash • Items to be used to generate cash • Controlled by the entity • Objectively measurable cost at the time of acquisition 5

  6. Intangible Assets • Can be shown in the BS if they are received in return for money or as a contribution to the subscribed capital • Can be written off during 5 years or during a longer period 6

  7. Tangible Assets:Property, Plant and Equipment • Also called “fixed” or “long-term” assets • Used for a long time to produce goods and services and to generate profit and cash • Building and equipment shown at: • Cost minus (-) accumulated depreciation ( Land is not depreciated) 7

  8. Investment property(only immovable one) • It is bought in order to wait for increasing of market price and therefore it is not used by the company • It can be given to another person for use • It can stay without using by anyone • It is revaluated according to market price every year in Latvia 8

  9. Current Assets Cash and other assets which change their nature within one year and which are expected to be converted in cash (sold ) or consumed during a normal operating cycle 9

  10. Stocks (Inventories) • Aggregate those items which are: • Held for sale in ordinary course of business • In process of production for sale, or • To be consumed in production of goods or services to be sold 10

  11. Accounts Receivable (Debtor) • Owed by customers and by other persons ( employee, owner, etc) • Only reliable debts can be shown in a BS. Bad debts must be written off. • Notes receivable: • Evidence by written promises to pay (notes) 11

  12. The main part of Liabilities(Equities): Owners’ Equity • Amount that owners invested in entity Assets – Liabilities = Net assets • For a corporation: shareholders’ equity (Shares of stock evidence ownership interest) • Could be invested in any assets on Balance Sheet 12

  13. Two Categories ofOwners’ Equity • Paid-in (US) or described (EU) capital that officially registered in a state organization Nominal value of shares (stocks) Additional payment (Share premium, AZIO) • Retained earnings (US) = Net-profit (EU) Profit minus (-) dividends If it is negative it means that deficit or loss is 13

  14. Creditors (EU) or Liabilities (US): common signs • Claims against entity’s assets . Not against specific assets unless indicated • Obligations to transfer assets or provide services to outside parties • Arising from past transactions or events • Reported at amount that would satisfy obligations on BS date: • Principal (the main, primary debt) + interest (according to contract or according to law) 14

  15. Creditors: some details • Accounts Payable: suppliers (vendors) claims for goods or services offered but not yet paid • Taxes Payable: owed to government . Income taxes often shown separately. • Accrued Expenses: earned by outside parties but not yet paid. Usually without invoice (interest, wages payable). • Deferred Revenues: advance payment received but the company has not yet rendered services or delivered products. 15

  16. Signs of a company’s stability 1. Equity > Creditors 2. Short term creditors > current assets What can you say about Grindex Group’s stability? What about our company the Balance Sheet of which we made at the beginning of this lesson? 16

  17. Differences between US and EU Balance Sheet • Liquidity: -decreasing order of liquidity (U.S.) -increasing order of liquidity (EU) • Revaluation of property and investment (possible and even recommended in EU) • Amount of shareholders’ capital shown in BS: --- paid -in (US) --- subscribed, partly paid-in (EU) 17

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