EXECUTIVE EDUCATION
INTRODUCING THE BALANCE SHEET ARJEN MULDER
EXPLANATION OF THE TOPIC
• This video will familiarise you with the concept of a
‘balance sheet’, by showing: 1. What is the purpose of a balance sheet? 2. What do the elements represent? 3. Why should you, as a non-financial manager, care?
PURPOSE OF BALANCE SHEETS
• A balance sheet shows: • What a firm owns (‘assets’), • What it owes (‘liabilities’) to its creditors, • The value of the business to the owners (‘shareholder
equity’),
all at a specific moment in time. • Since the snapshot information is not necessarily
informative, the balance sheet usually also shows the data of the previous year. Together, we can not only infer whether a firm has done well over the past year, but also whether it has improved or not.
WHY SHOULD A NON-FINANCIAL MANAGER KNOW THIS?
• Analysts use balance sheet information to: • Forecast whether a firm can pay its bills, • Analyse how much money the owners have put into
the firm. • This is called ‘financial statement analysis’. In class
we will practise how to do that. • To derive useful information from a balance sheet, a
minimum working knowledge is required.
WHAT IS A BALANCE SHEET?
• Consider the following typical balance sheet. FnF Labs, thousands Assets
e
Liabilities and Owners’ Equity
Cash and cash equivalents
100
Short-term borrowings
Short-term financial assets
140
Accounts payable
Accounts receivables
250
Income taxes
Inventories
500
Accrued liabilities and provisions
Other current assets
10
Other current liabilities
Total current assets
1,000
Total current liabilities
Property, Plant, and Equipment
1,700
Patents Goodwill
e 50 120 70 240 20 500
Corporate bonds
750
100
Long-term bank loans
420
200
Leasing obligations
430
Total non-current assets
2,000
Long-term liabilities
1,600
Total Assets
3,000
Owners’ Equity Total Liabilities and O.E.
900 3,000
SOME DETAILS OF A BALANCE SHEET (1) BALANCE SHEET EXAMPLE Assets
e
Liabilities and Owners’ Equity
Current assets
1,000
Current liabilities
Non-current assets
2,000
Long-term liabilities Owners’ Equity
Total Assets
3,000
Total Liabilities & O.E.
e 500 1,600 900 3,000
SOME DETAILS OF A BALANCE SHEET BALANCE SHEET EXAMPLE: CURRENT ASSETS Assets Current assets
e 1,000
Liabilities and Owners’ Equity Current liabilities
• Cash and cash equivalents
100
Long-term liabilities
• Short-term financial assets
140
Owners’ Equity
• Accounts receivables
250
• Inventories
500
• Other current assets
e 500 1,600 900
10
Non-current assets
2,000
Total Assets
3,000
Total Liabilities & O.E.
3,000
SOME DETAILS OF A BALANCE SHEET BALANCE SHEET EXAMPLE: NON-CURRENT ASSETS Assets
e
Liabilities and Owners’ Equity
Current assets
1,000
Current liabilities
Non-current assets
2,000
Long-term liabilities
• Property, Plant, and Equipment
1,700
Owners’ Equity
• Patents • Goodwill Total Assets
e 500 1,600 900
100 200 3,000
Total Liabilities & O.E.
3,000
SOME DETAILS OF A BALANCE SHEET BALANCE SHEET EXAMPLE: CURRENT LIABILITIES Assets
e
Liabilities and Owners’ Equity
Current assets
1,000
Current liabilities
Non-current assets
2,000
• Short-term borrowings • Accounts payable • Income taxes • Accrued liabilities and provisions • Other current liabilities Long-term liabilities Owners’ Equity
Total Assets
3,000
Total Liabilities & O.E.
e 500 50 120 70 240 20 1,600 900 3,000
SOME DETAILS OF A BALANCE SHEET BALANCE SHEET EXAMPLE: LONG-TERM DEBT Assets
e
Liabilities and Owners’ Equity
Current assets
1,000
Current liabilities
Non-current assets
2,000
Long-term liabilities
3,000
1,600
• Corporate bonds
750
• Long-term bank loans
420
• Leasing obligations
430
Owners’ Equity Total Assets
e 500
Total Liabilities & O.E.
900 3,000
SOME DETAILS OF A BALANCE SHEET BALANCE SHEET EXAMPLE: OWNERS’ EQUITY Assets
e
Liabilities and Owners’ Equity
Current assets
1,000
Current liabilities
Non-current assets
2,000
Long-term liabilities Owners’ Equity
3,000
1,600 900
• Paid-in capital
550
• Acc. retained earnings
220
• Reserves Total Assets
e 500
Total Liabilities & O.E.
130 3,000
SUMMARY
• In this video we have had a close look at the balance
sheet.
• The purpose of this video was to familiarise you with
the balance sheet, as a preparation for your ‘Finance for Non-Financial Managers’ course.
