Reading a balance sheet.[check] This checklist is designed to help you read and understand a balance sheet. It is intended as a guide, not as a replacement for full accounting support and interpretation. Definition A balance sheet is a snapshot (1) A saved copy of memory including the contents of all memory bytes, hardware registers and status indicators. It is periodically taken in order to restore the system in the event of failure. (2) A saved copy of a file before it is updated. of a company's financial position at a given date. It differs from a profit and loss account which summarises a company's trading performance during a given period. The date of the balance sheet is always disclosed in the heading and the figures are (or should be) correct as at that date. Every balance sheet includes the balance of every account in the accounting system. Accounts are not usually shown individually, but those of a similar nature are grouped to show just one net figure for each category. For example, there may be many accounts relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc fixed assets fixed assets npl → activo sg fijo fixed assets npl → immobilisations fpl fixed assets fix npl → and accumulated depreciation accumulated depreciation The total amount of depreciation that has been recorded for an asset since its date of acquisition. For example, a computer with a 5-year estimated life that was purchased for $2,000 would have accumulated depreciation of $800 [( , but just one net figure will be shown in the balance sheet. All the accounts of a profit and loss nature are aggregated to show a net profit or net loss. This is shown in the balance sheet as part of capital and reserves. A balance sheet summarises the balances in a double-entry bookkeeping Double-entry bookkeeping Accounting method that records each transaction as both a credit and a debit in different accounts. system and as a consequence it must balance. This means that the total of all the debit balances Debit balance The amount that is owed to a broker by a margin customer for loans the customer uses to buy securities. debit balance The amount owed in a brokerage margin account. (assets) must equal the total of all the credit balances (liabilities). These totals always appear twice. The method of presentation usually shows some liabilities being deducted de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. from the assets, but there are always two identical totals. A company may produce a balance sheet for internal purposes; this may be done in any way chosen by the management and as at any date. However, a balance sheet must be prepared as at the last day of the company's financial year, which is the final date of the profit and loss period. This balance sheet is published and it must be drawn up in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with recognised statutory and accounting rules. Advantages of understanding a balance sheet * It should help provide a thorough and detailed understanding of a company's financial position. This is especially true when it is studied in conjunction with the notes and the other financial statements. * It may be compared with earlier balance sheets to see how a company is progressing. * It should indicate the solvency The ability of an individual to pay his or her debts as they mature in the normal and ordinary course of business, or the financial condition of owning property of sufficient value to discharge all of one's debts. solvency n. and liquidity of a company and it may predict impending im·pend intr.v. im·pend·ed, im·pend·ing, im·pends 1. To be about to occur: Her retirement is impending. 2. financial difficulties. Points to remember about balance sheets * A balance sheet is always out of date. It shows figures obtained at some specified date in the past. * Some of the figures may reflect subjective judgments. Examples are the bad debt reserve and the valuation of stocks. * Some of the book values may differ from the 'real-life' realisable values. An example is the figure for fixed assets after accumulated depreciation. Published balance sheets The balance sheet on the last page must be in a form suitable for publication. The Companies Act 1985 as amended a·mend v. a·mend·ed, a·mend·ing, a·mends v.tr. 1. To change for the better; improve: amended the earlier proposal so as to make it more comprehensive. 2. requires that published balance sheets are shown in one of two specified formats--the horizontal format or the vertical format. Virtually all balance sheets are in the vertical format, and the example is shown in this way. The Companies Act specifies a long list of headings that must be used. However, if there is a nil balance for a heading, it may be omitted. A balance sheet should always accompanied by explanatory ex·plan·a·to·ry adj. Serving or intended to explain: an explanatory paragraph. ex·plan notes. Comparative figures for the previous published balance sheet must be given. A balance sheet must be formally approved by the directors and signed by one of them. It must be sent to Companies House within 10 months (if it is a private company) or 7 months (if it is a public company). The directors may take an extra 3 months if there are exports or overseas interests. Anyone can get a copy of the balance sheet of any company by telephoning Companies House on 0870 333 3636. If the annual turnover exceeds 1,000,000 [pounds sterling] (90,000 [pounds sterling] for a charitable company) a balance sheet must be audited. An audit is also required for some companies that have a lower turnover. These figures are currently under review and may be increased. Action checklist 1. Look at shareholders' funds The balance sheet is set out showing the liabilities deducted from the assets. The amount left over, provided that the company is solvent solvent, constituent of a solution that acts as a dissolving agent. In solutions of solids or gases in a liquid, the liquid is the solvent. In all other solutions (i.e. , is the value that the owners have invested in it. In the example this figure is 6,321,813 [pounds sterling]. Shareholders' funds will be split into share capital accounts, reserve accounts and profit and loss account. Notes will give further details. If, in the example, there are 1,000,000 shares in issue, each has a net asset backing of 6.32 [pounds sterling]. 2. Look at net current assets Net current assets The difference between current assets and current liabilities, also known as working capital. net current assets See working capital. Current assets Current Assets Appearing on a company's balance sheet, it represents cash, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that can be converted to cash within one year. are likely to be owned for less than a year or realisable in less than a year, and further details are usually given in the notes. They may include: * short-term Short-term Any investments with a maturity of one year or less. short-term 1. Of or relating to a gain or loss on the value of an asset that has been held less than a specified period of time. investments * stocks * money owed to the company (debtors) * prepayments Prepayments Payments made in excess of scheduled mortgage principal repayments. (payments, such as rent, made in advance) * bank accounts in credit * cash. 3. Look at current liabilities Current Liabilities Usually appearing on a company's balance sheet, it represents the amount owed for interest, accounts payable, short-term loans, expenses incurred but unpaid, and other debts due within one year. Current liabilities are short-term debts Short-term debt Debt obligations, recorded as current liabilities, requiring payment within the year. due to be settled within the next year and further details are usually given in the notes. They may include: * bank overdrafts and short-term loans * money owed by the company (creditors) * accruals Accruals Accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. These accounts include, among many others, accounts payable, accounts receivable, goodwill, future tax liability and future interest expense. (debts incurred where invoices have not yet been received). 4. Consider the figure for net current assets This is current assets less current liabilities. It is a very important figure. The greater the figure the greater the margin of safety, with less chance of a funding crisis in the near future. There is nearly always a figure for net current assets, and a deficit is termed net current liabilities. This would be cause for serious concern or, at the very least, indicate a need to ask some searching questions. In the example the figure is 4,691,499[pounds sterling]. This seems satisfactory. 5. Examine the fixed assets Assets are items owned by the company, expressed in financial terms. 'Fixed assets' are those items of long-term value to a business and appear at the top of the balance sheet. They may be divided into three categories: * tangible--land, buildings, plant, equipment, machinery, fixtures and fittings, motor vehicles * intangible--licences, intellectual property, patents, goodwill * investments--in other companies, government stocks government stocks government npl → Staatspapiere pl, Staatsanleihen pl . Fixed assets are likely to be long-term assets Long-Term Assets 1. Reported on the balance sheet, it's the value of a company's property, equipment and other capital assets, less depreciation. 2. A stock, bond or other asset that you plan on holding in your portfolio for a lengthy period of time. and are most likely to be items in which the company does not trade. 6. Consider the accounting policies The key accounting policies will be disclosed in the notes. The most important questions are likely to include: * How are the stocks valued? * What are the policies concerning depreciation of fixed assets? * What are the policies concerning the bad debt reserve and other reserves? Different accounting policies will produce different profit or loss figures and a different balance sheet. Any change in accounting policies may be particularly important and must be disclosed in the notes. Dos and don'ts for understanding a balance sheet Do * Remember that it is essential to read the notes and study the accounting policies. * Remember that it is useful to study carefully selected ratios and that it is useful to compare balance * sheets as at different dates. * Remember to study the balance sheet in conjunction with the other financial statements and reports. It is important to see the complete picture. Don't * Forget that the assets are 'book values' and not necessarily what would actually be obtained in the event of a sale. * Forget that a balance sheet is a snapshot on one particular one day, and that it is out of date by the time it appears. Useful reading The meaning of company accounts, 8th ed, Walter Reid and D R Myddleton Aldershot: Gower, 2005 Reading between the lines Between the lines can refer to:
How to read a financial report: wringing wring v. wrung , wring·ing, wrings v.tr. 1. To twist, squeeze, or compress, especially so as to extract liquid. Often used with out. 2. vital signs out of the numbers 5th ed, John A Tracey New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of NY: John Wiley John Wiley may refer to:
ACME LTD
Balance Sheet at 30th June 2001
30th June 2001
[pounds [pounds
sterling] sterling]
Fixed assets
Tangible assets 2,398,834
Current assets
Stocks 5,545,805
Debtors 4,614,264
Investments 28,250
Cash at bank and in hand 3,423
10,191,742
Creditors: amounts falling due
within one year (5,500,243)
Net current assets 4,691,499
Total assets less current liabilities 7,090,333
Creditors: amounts falling due
after more than one year (747,655)
Provision for liabilities and charges (20,855)
Net assets 6,321,813
Capital and reserves
Called up share capital 1,779,992
Revaluation reserve 620,240
Profit and loss account 3,921,581
Shareholders' funds 6,321,813
30th June 2000
[pounds [pounds
sterling] sterling]
Fixed assets 2,450,804
Tangible assets
Current assets 5,068,240
Stocks 5,948,817
Debtors 94,930
Investments 3,467
Cash at bank and in hand 11,115,454
Creditors: amounts falling due (6,642,622)
within one year 4,472,832
Net current assets 6,923,636
Total assets less current liabilities
Creditors: amounts falling due (918,458)
after more than one year (37,100)
Provision for liabilities and charges 5,968,078
Net assets
Capital and reserves 1,779,992
Called up share capital 634,200
Revaluation reserve 3,553,886
Profit and loss account 5,968,078
Shareholders' funds
The financial statements were approved by the Board on
Director
The notes on pages ... to ... form part of these financial statements.
|
|
||||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion