Poojita Sireesha Rita Sai Sashidhar Roshan Mayank

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

Balance sheet

Balance Sheet Reports:

What A Business Owns-Assets What A Business Owes-Liabilities What A Business is Worth-Owners Equity

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

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

 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--vis its peers

 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

General Format Of Balance Sheet

Assets
Current assets Noncurrent assets Total assets $XXX XXX $XXX Owners equity Total liabilities and owners equity XXX $XXX

Liabilities
Current liabilities $XXX Noncurrent liabilities XXX Total liabilities $XXX

Three Sections of a Balance Sheet

Assets Liabilities Owners Equity

Methods Of Balance Sheet Analysis

Horizontal Analysis Vertical Analysis Common-Size Statements Trend Percentages Ratio Analysis

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

Calculating Change in Dollar Amounts

Dollar Change

= Current Year

- Base Year Figure

Calculating Change as a Percentage

Dollar Change Base Year Figure

Percentage Change

* 100

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

Vertical Analysis Example

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

Vertical Analysis Example

$76,000 $483,000 = 16% rounded

Common Size Statement:

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

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

Trend Percentages Example

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

$1,991 - $1,820 = $171 $171 $1,820 = 9% rounded

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

Classification Of Ratios
A. Liquidity Ratios B. Solvency Ratios C. Activity Ratios D. Profitability Ratios E. Shareholders' Ratios

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

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

Measurement Of Current Ratio

Current Assets Current Ratio = Current Liabilites

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

Measurement Of Acid Test Ratio

Quick Assets

Acid Test Ratio =

Quick Liabilities

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

Measurement Of Working Capital Turnover Ratio

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

Types Of Solvency Ratio

1) 2) 3) 4) 5) Interest Coverage Ratio Debt Ratio Debt-Equity Ratio Capital Gearing Ratio Proprietary Ratio

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

4. Capital Gearing Ratio = Fixed Income Bearing Securities Equity Shareholders Fund 5. Proprietory Ratio = Shareholder Funds Total Assets

C. Activity Ratio
1) 2) 3) 4) 5) 6) Inventory Turnover Ratio Debtors Turnover Ratio Average Collection Period Fixed Assets Turnover Ratio Total Assets Turnover Ratio Capital Turnover Ratio

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.

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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