Analysing balance sheets

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Using financial data to measure and assess perform

  • Many of the performance indicators used by businesses are financial in nature.
  • One way in which businesses gather such data is to prepare financial statements and account
  • Financial statements such as balance sheets and profit and loss accounts or income statements are important examples.
  • Accounting is the process of identifying, measuring and communicating information to permit informed judgments and decisions by users of the information.
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Balance Sheets

  • ASSETS are the resources that a business owns and uses. Assets are usually divided into current assets and fixed assets.
  • Current assets are used up in production, such as stocks of raw material
  • Fixed assets, such as machinery, are used again and again over a period of time.
  • LIABILITIES are the debts of the business.
  • Liabilities are a source of funds for a business. Short-term such as overdraft, or long-term, such as mortgage or a long-term bank loan.
  • CAPITAL is the money introduced by the owners of the business.
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Presenting the balance sheet

  • One advantage of presenting the balance sheet in this format is that it is easy to see the amount of working capital that a business has.
  • Important because the working capital shows whether a business is able to pay its day-to-day bills.
  • The balance sheet is a record of the company's assets, liabilities and capital.
  • Non-current assests replaces the term fixed assets
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KEY-TERMS PAGE 1

  • Accounting - The process of identifying, measuring and communicating information to permit informed judgments and decisions by users of the information.
  • Assets - Resources used or owned by the business in production.
  • Balance sheet - A summary at a point in time of business assets, liabilities and capital.
  • Capital - A source of funds provided by the owners of the business used to buy assets.
  • Current assets - Assets likely to be changed into cash within a year
  • Current liabilities - Debts that have to be repaid within a year.
  • Drawings - Money withdrawn by a sole trader from the business for personal use.
  • Fixed assets - Assets with a lifespan of more than one year
  • Liabilities - The debts of the business which provide a source of funds
  • Long-term liabilities - Debts that are payable after 12 months.
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KEY-TERMS PAGE 2

  • Net assets - The value of total assets minus current liabilities minus long-term liabilities. The value is equal to capital and reserves on the balance sheet.
  • Net current assets - Current assets minus current liabilities.
  • Non current assets - The long-term assets of a plc which are not expected to be sold within 12 months.
  • Non current liabilities - The long-term liabilities of a plc - any amount of money owed for more than 12 months
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