Lesson 2.Balance Sheet: Small details Checking of homework. Making of BS. Assets and Liabilities: explanation of some items. Signs of a company’s financial stability. Differencies between US and EU BS.
Resources and Claims View • Assets = Claims on assets • Owners’ equity is a residual claim • Shortcomings: • Balance Sheet is not at market or liquidating values, Owners’ equity as a claim is unclear • Claim is a legalistic view • Better suited to liquidation, not to going concern
Sources and Uses of Funds View • Left hand side = assets = how funds used or invested • Right hand side = liabilities + owners’ equity = sources of funds = how assets were financed
Account Categories • Groups of related items • Classifications of: • Assets • Equities (i.e. liabilities, owners’ equity) • Revenues • Expenses • Discretion of management
Assets • Acquired in a transaction • Economic resources (i.e. 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 time of acquisition
Intangible Assets • Can be show in BS, if they had been received in return of money or as a contribution in subscribed capital • Can be written off during 5 years or during more longer pariod
Property, Plant, and Equipment • Also, called fixed assets • Tangible • Long-lived • Used to produce goods and services to generate cash inflows • Land is not depreciated • Building and equipment shown at: • Cost less accumulated depreciation
Investment property(only immovable one) • Which is not used by a company • It can be given to another person for using • It can be not used at all
Current Assets • Cash • Other assets expected to be realized in cash or sold or consumed within longer of one year or normal operating cycle
Stocks (Inventories) • Aggregate of those items that 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
Accounts Receivable (Debtor) • Owed by customers • Only reliable debts can be shown in BS. Unreliable debts must be written off BS. • Other receivables: • Owed by other than customers • Notes receivable: • Evidence by written promises to pay (notes)
Liabilities (Equites): Owners’ Equity • Amount owners’ invested in entity • = Assets – Liabilities = Net assets • For a corporation: shareholders’ or stockholders’ equity • Shares of stock evidence ownership interest • Could be invested in any assets on Balance Sheet
Two Categories ofShareholders’ Equity • Paid-in (US) or discribed (EU) contributed capital Aadditional payment (Share premium, AZIO or DISAZIO) Capital stock (at stated or par value) • Retained earnings (US) or Net-profit (EU) Profit less dividends If negative, deficit (loss)
Creditors: common signs • Obligations to transfer assets or provide services to outside parties • Arising from past transactions or events • Claims against entity’s assets • Not against specific assets, unless indicated • Reported at amount that would satisfy obligations on BS date: • Principal + interest (through BS date)
Creditors: some details • Accounts Payable: suppliers (vendors) claims for goods or services furnished but not yet paid • Taxes Payable: owed to government for taxes. Income taxes often shown separately. • Accrued Expenses:earned by outside parties but not yet paid. Usually no invoice (interest, wages payable). • Deferred Revenues: adance payment received but company has not yet performed service or delivered product.
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 which Balance Sheet we have made in the beginning of this lesson?
Differencies between US and EU Balance Sheet • Liquidity (layout of Assets) • Evaluation of property and investment • Admission of share holders capital
Tasks for independent work Try to change Grindex group’s Balance Sheet according to requirements of US.