IB Business and Management ACCOUNTS & FINANCE 3.5 The Balance Sheet

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IB Business and Management ACCOUNTS & FINANCE: 3.5 Financial Accounts -The Balance Sheet

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IB Business and Management .com IB Business and Management T he IB Diploma Business and Management course delivered IN STYLE , ONLINE . ©

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z Financial accounts 3.5

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z What is a Balance sheet?

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z Balance sheets One of the financial statements that companies are legally required to produce It’s a ‘ snapshot ’. A record of an organization’s financial posibecause the financial document shows a firm’tion at a specific date It shows where a firm’s money has come from (capital & liabilities) and what it has been spent on (assets) It is called a balance sheet because it shows a firm’s sources of finance (shown as the capital employed ) and where that money has been spent (shown as the assets employed ); i.e. It shows where a firm’s money has come from ( capital & liabilities ) and what it has been spent on ( assets ). This helps to ensure that all monies within the organisation are properly accounted for.

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z Assets are items owned by or owed to a business and hold a monetary value, such as cash or buildings. assets cash or any liquid asset that is likely to be turned into cash within 12 months – cash, debtors & stocks Current assets Any asset that’s purchased for business use, rather than for selling, and is likely to last for 12 + months Tangible fixed assets Intangible fixed assets investments Fixed assets

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A legal obligation of a business to repay its lenders or suppliers at a later date z liabilities Debts that must be settled within one year (of the balance sheet date); e.g. tax to the govt., overdrafts & loan interest current liabilities Debts due to be repaid after 12 months; i.e. they are sources of long-term borrowing (debentures, mortgages & bank loans) long-term liabilities

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z Capital & reserves Share capital : the amount of money raised through the sale of shares (when first sold) Shareholders’ funds Limited liability companies Retained profit : the amount of net profit after interest, tax and dividends have been paid Owner’s equity Partnerships & sole traders Reserves : any retained profits from profits in previous trading years.

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z the balance sheet Net assets = fixed assets + working capital (working capital = current assets – current liabilities) Net assets = long-term liabilities + owner’s equity owner’s equity = Net assets – long-term liabilities

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z Constructing a balance sheet 2013 ($’000) Bank overdraft 20 Property 200 Vehicles 20 Other equipment 30 Cash 25 Creditors 50 Debtors 70 Debentures 50 Long-term loan 50 Retained profit 75 Share capital 200 2012 ($000) ASSETS Fixed Assets: Property 200 Vehicles 20 Other equipment 3 0 Current Assets: Cash 25 Debtors 70 Current Liabilities: Creditors 5 0 Bank overdraft 20 Net current assets NET ASSETS Long-term Liabilities: Long-term loan 50 Debentures 50 Shareholders Equity: Share capital 100 Retained earnings 75 CAPITAL EMPLOYED 250 95 70 25 275 100 175 275

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z Balance sheets - The uses of balance sheets uses limitations The difference between current assets and current liabilities shows us the net current assets ( working capital ). We can determine the short-term liquidity position of the business. The asset structure can be analysed ; E.g. an increase in fixed assets may indicate an expansion, or a significant increase in stocks may indicate overtrading. The capital structure can be analysed to see the sources of finance; e.g. shareholders’ capital, debentures and current liabilities. The firm’s capital employed can give an indication of its size. The higher a firm’s capital employed, the greater its market value tends to be.

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z Balance sheets - The uses of balance sheets uses limitations Since they are static documents, the financial position of the business may be very different in subsequent periods. The figures given are, at best, only ‘accurate’ estimates of the value of assets and liabilities. The market value of an asset is not necessarily the same as it s book value Not all assets, especially the intangible assets and the value of human capital , are necessarily included in a balance sheet.

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