PoojitaSireeshaRitaSai SashidharRoshanMayank

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In Accounting, An Itemized Statement Of What One Owns, What One Owes, and What One Is Worth Is Called A:

Balance sheet

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Balance Sheet Reports:

What A Business Owns-Assets What A Business Owes-Liabilities What A Business is Worth-Owner’s Equity

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The Balance Sheet

• Summarizes the financial condition of the business at a point in time:

– Remember - the “snapshot” idea!

• Estimates net worth or owner equity.

• Most transactions affect the balance sheet, so it may change daily

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Purpose Of Balance Sheet

• Everything “owned” and “owed” by a business or individual at a given point in time.

• Asset – anything of value owned.• Liability – any debt or other financial obligation owed

to someone else.• Owner Equity/Net worth – the amount the owner has

invested in the business. • “Balance” idea:

Owner Equity = Assets – Liabilities

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• To identify potential liquidity problems

Company's ability / inability to meet financial obligations

– the degree to which a co is leveraged or indebted

• Working capital

How strong a co is to meet its short term liabilities

• Bankruptcy

Will the co be able to meet its payments

• Standing vis-à-vis its peers

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• Used to measure the financial condition of the business (management tool):

• Compare to other, but similar businesses.

• Compare to the same business over time.

• Lenders use balance sheet analysis to make lending decisions and to monitor the financial progress of their customers.

• To deal with relative size issue, use what

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General Format Of Balance Sheet

Assets

Current assets $XXX

Noncurrent assets XXX

Total assets $XXX

Liabilities

Current liabilities $XXX

Noncurrent liabilities XXX

Total liabilities $XXX

Owner’s equity XXX

Total liabilities and

owner’s equity $XXX

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Three Sections of a Balance Sheet

• Assets

• Liabilities

• Owner’s Equity

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Methods Of Balance Sheet Analysis

• Horizontal Analysis

• Vertical Analysis

• Common-Size Statements

• Trend Percentages

• Ratio Analysis

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Horizontal Method:

Using comparative financial statements to calculate dollar or percentage changes in a financial statement item from one period to the next

Using comparative financial statements to calculate dollar or percentage changes in a financial statement item from one period to the next

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Calculating Change in Dollar Amounts

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= -Dollar Change

Current Year

Base Year Figure

Calculating Change as a Percentage

Percentage Change

Dollar Change Base Year Figure

= 100*

Vertical Method:

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For a single financial statement, each item is expressed as a percentage of a significant total, e.g., all income statement items are expressed as a percentage of sales

For a single financial statement, each item is expressed as a percentage of a significant total, e.g., all income statement items are expressed as a percentage of sales

Vertical Analysis Example

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$82,000 ÷ $483,000 = 17% rounded$30,000 ÷ $387,000 = 8% rounded

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Vertical Analysis Example

$76,000 ÷ $483,000 = 16% rounded

Common Size Statement:

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• Financial statements that show only percentages and no absolute dollar amounts

• Financial statements that show only percentages and no absolute dollar amounts

Trend Percentage:

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Show changes over time in given financial statement items (can help evaluate financial information of several years)

Show changes over time in given financial statement items (can help evaluate financial information of several years)

Trend Percentages Example

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Using 1995 as the base year, we develop the following percentage relationships

$1,991 - $1,820 = $1,991 - $1,820 = $171$171$171 ÷ $1,820 = 9% $171 ÷ $1,820 = 9% roundedrounded

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Ratio Analysis:

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Expression of logical relationships between items in a financial statement of a single period (e.g., percentage relationship between revenue and net income)

Expression of logical relationships between items in a financial statement of a single period (e.g., percentage relationship between revenue and net income)

Purpose/Importance/Advantages

• Analysis of financial Position

• Simplification of Accounting Figures

• Assessment of Operational Efficiency

• Determining Trends in the long-run

• Identification of Strength & Weakness

• Taking Remedial Measures

• Comparison of Performance

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Classification Of Ratios

A. Liquidity Ratios

B. Solvency Ratios

C. Activity Ratios

D. Profitability Ratios

E. Shareholders' Ratios

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A. Liquidity Ratio

• Used to study the ability of the organisation in meeting short-term payments or obligations

• Includes:

1) Current Ratio,

2) Acid Test Ratio and

3) Working Capital Turnover Ratio

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1. Current Ratio

• Relation between current assets and current liabilities

• Long Term Sources Financing the Current assets give a stable base for the liquidity of the organisation

• Normally , the ratio should not be less than 2 i.e., the current assets should be double the size of current liabilities

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Measurement Of Current Ratio

Current AssetsCurrent Liabilites

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Current Ratio

=

2.Acid Test Ratio/Quick Ratio

• It is the ratio between quick assets and quick liabilities

• Quick assets include current assets except inventory and pre-paid expenses

• Quick liabilities include current liabilities other than bank overdraft

• A 1:1 ratio is healthy

• Healthy indicator of cash management

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Measurement Of Acid Test Ratio

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Quick Assets

Quick LiabilitiesAcid Test Ratio

=

3.Working Capital Turn-over Ratio

• Shows the efficiency of usage of working capital• Relation between Sales and Working Capital• Determination of number of times the working

capital is turned over to achieve the maximum profit

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Measurement Of Working Capital Turnover Ratio

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Working Capital Turnover Ratio

= Net Sales

Average Working Capital

B. Solvency Ratio

• Measure long-term liquidity ratio

• Reflect the ability of the firm to pay interest and repayment of loans at due dates on the long-term loans taken

• Avoidance of over-borrowing (over-leverage)

• Avoidance of bankruptcy by maintaining healthy solvency ratios

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Types Of Solvency Ratio

1) Interest Coverage Ratio

2) Debt Ratio

3) Debt-Equity Ratio

4) Capital Gearing Ratio

5) Proprietary Ratio

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1. Interest Coverage Ratio= Profit Before Interest and Tax

Interest On Loan-Term Debt

2. Debt Ratio = LT Debt

LTD+Shareholders Fund

3. Debt Equity Ratio = Long Term Debt

Shareholders Fund

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4. Capital Gearing Ratio = Fixed Income Bearing Securities

Equity Shareholders Fund

5. Proprietory Ratio = Shareholder Funds

Total Assets

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C. Activity Ratio

1) Inventory Turnover Ratio

2) Debtors Turnover Ratio

3) Average Collection Period

4) Fixed Assets Turnover Ratio

5) Total Assets Turnover Ratio

6) Capital Turnover Ratio

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Advantages Of Balance Sheet

• It is helpful in ascertaining the financial position of the business by showing assets and liabilities of the concern on a specific date.

• It discloses the solvency of business by showing how much assets are available for payment of liabilities.

• It also disclose the proprietary interest of owner.

• It helps in calculation of various ratios which help in better management of business.

• It helps in comparison of assets and liabilities of business on two dates to ascertain the progress being made by business.

• It helps to ascertain the amount of capital employed in business.

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Limitations Of Balance Sheet

• Some of the current assets are valued on estimated basis, so the Balance sheet is not in a position to reflect the true financial position of the business.

• Fixed assets are shown in the Balance sheet at original cost less depreciation up-to-date. Thus Balance sheet does not show true value of assets.

• Balance sheet can not reflect those assets which cannot be expressed in monetary terms such as skill, honesty and loyalty of workers.

• Intangible assets like goodwill are shown in the Balance Sheet at imaginary figures which may bear no relationship to the market value.

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THANK YOU!

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