Structure and Contents of Balance Sheets
Assets; categorised into Non-current (such as machinary, equipment, and vehicles that are bought for long term use), and Current (such as inventories, raw materials, unsold goods, things that will be turned into cash by the end of the financial year).
Liabilities; Non-current are moneys employed by the business that have been borrowed from external sources which will be repaid over long term such as mortgages and bank loans. Current are debts of the business that will be repaid within a year, the most common are known as payables.
How to analyse Balance Sheets
- Just a snapshot on one day of the year, information may be exactly opposite in a couple month's time.
- External considerations must be made such as the state of the market or economy.
Balance sheets, Working Capital, and Liquidity
Working capital; amount of funds for it's day to day operations. Used to pay for wages and replacing stock. Too much may mean that they aren't earning enough revenue.
Liquidity; extent to which a business can repay short term debts. This measures;
- Ability to meet it's short term debts.
- Ability to turn it's assets into cash.
Structure and Contents of Income Statements
Accounting statement that shows a firm's sales revenue generated over a trading period and all costs incurred in earning that revenue.
Gross profit is the measure of difference between sales revenue and cost of production. Operating profit is your gross profit, and then deducting your expenses and overheads.
Analysing Income Statements
Profits may be used in two ways;
- Retained profits; share of profits kept by the company and added to the balance sheet reserves. They increase the value of the company, helping it to expand.
- Distributed profits; portion of a company's profit shared out to external parties, such as owners, partners, or shareholders.