CHAP 58 BALANCE SHEETS AND INCOME STATEMENTS

Published accounnts allow Analysts to find out:

-The AMOUNT of cash or near-cash the company holds

-HOW the cash total comparies with its short-term liabilities

-HOW much all the firm's long term capital is in the form of debt

-HOW profitable the business is

COMPOSITION:

-'Snapshot' showing position of a company at a given point in time

-Consists of firm's capital. May come from shareholders, bankers or reinvested profit

TYPES OF ASSET:

Long-term (non-current) assets: Land, buildings, plants, machinery, equipment, vehicles, patents, copyrights.

Short-term (current) assets: Inventories (value of stock firm holds), Receivables (sums owed by customers), Cash (forms of bank account),

Capital on Balance Sheet:

-Sources of long-term capital: shareholders (share capital), Banks (loan capital), and reinvested profits (reserves)

-Loan capital carries interest charges that MUST be repaid, as must the loan itself

-Share capital and reserves are both owed to the shareholders, but don't have to be repaid (total equity)

-The level of success achieved by a business

-Measured by profit

-E.g. Percentage growth in profit compared with previous year

-Records all a businesses' revenues and costs within a given trading period

STAKEHOLDERS INTERESTED IN PROFIT:

-Shareholders

-Government agencies such as tax authorities need data on profits/losses to calculate liability of a business to corporation tax

-Suppliers to a business need to know the financial position of the companies they trade with establishing their reliability, stability and creditworthiness

-Potential shareholders and bankers to see if they want to commit funds to the business

USES:

-Measure success of a business compared with previous years or other businesses

-Asses actual performance compared with expectations

-Help obtain loans from banks or other lending institutions

-Enable owners and managers to plan ahead

FOUR STAGES:

1) Gross profit is calculated. Difference between income and cost of goods sold.

2) Operating profit is calculated. Deducting the main types of overhead such as distribution and administration costs.

3) Profit before taxation is calculated. Inclusion of interest recieved by business and interest paid into it.

4) Profit after taxation is calculated. Deducting the amount of tax payable for the year showing new amount earned for shareholders.

GROSS PROFIT:

Income (revenue) - cost of goods sold = gross profit

OPERATING PROFIT:

Gross profit - expenses = operating profit

Expenses: Payments for something of immediate use of the business

Overhead expenses:

-Wages and salaries

-Rent and sales

-Heating, lighting, and insurance

-Distribution costs

OPERATING PROFIT:

-Up by at least the rate of inflation compared with the previous year

-At least as a high percentage of capital employed as that achieved by rival companies

-High enough to reinvest in the future of the business while still paying satisfactory dividends to shareholders

FINANCING COSTS:

-Can add or take away from operating profit

-Companies with large burrowings have to pay a large proportion of profit in interest charges

PROFIT BEFORE AND AFTER TAXATION:

-All businesses pay corporation tax on profits

USING PROFITS:

DISTRIBUTED PROFIT: Amount to be paid out to shareholders in form of dividends

RETAINED PROFIT: Money used to reinvest in the business.

-Public limited companies need to publish their accounts

-Income statement for external informtion has as little information as possible

CORPORATION TAX: Tax levied as a percentage of a company's profits

COST OF GOODS SOLD: Calculation of direct costs involved in making the goods actually sold in that period

CREDITORS: Those to whom a firm owes money (e.g. suppliers or bankers); may also be called payables

GROSS PROFIT: Revenue - costs of goods sold; profit made on trading activities

LIABILITY: A debt (bill or loan that hasn't been paid)

LIQUIDITY: Measurement of a firm's ability to pay short term bills

OPERATING PROFIT: Gross profit - expenses

RESERVES: Company's accumulated, retained profit; forms part of company's total equity.

REVENUE: Sales revenue (value of sales), or income

STOCK EXCHANGE: Market for stocks and shares; supervises the issuing of shares by companies and also a second hand market for stocks and shares.