7.2a - Balance Sheets

Question 1

Balance sheet definition

Answer 1

A measure of the accumulated value of a business since it began

Question 2

What can balance sheets be used to judge?

Answer 2

• Business’ worth
• Debts
• Sources of finance
• Changes over time

Question 3

Equity formula

Answer 3

Non-current assets + current assets - non-current liabilities - current liabilities

Question 4

Non-current assets definition

Answer 4

Assets that have been part of the business for more than a year

Question 5

Current assets definition

Answer 5

Assets that have been part of the business for less than a year

Question 6

Non-current liabilities definition

Answer 6

Liabilities that will be paid back in more than one year

Question 7

Current liabilities definition

Answer 7

Liabilities that will be paid back in less than one year

Question 8

Total equity definition

Answer 8

The total of all the money that has been put into the business

Question 9

Net current assets formula

Answer 9

Current assets - current liabilities

Question 10

Net assets formula

Answer 10

Non-current assets + net current assets - non-current liabilities

Question 11

Assets employed formula

Answer 11

Net current assets + non-current assets

Question 12

Capital employed formula

Answer 12

Total equity + non-current liabilities

Question 13

Depreciation definition

Answer 13

When assets lose value over time

Question 14

Working capital definition

Answer 14

The amount of cash, and assets that can be easily turned into cash, that the business has available to pay day-to-day debts

Question 15

Working capital formula

Answer 15

Current assets - current liabilities

Question 16

Why would a business need to hold more cash?

Answer 16

• Inflation increasing cost of wages and stock
• Long cash-flow cycle as they need to wait for money to come in
• They are expanding, so need cash to avoid overtrading

Question 17

Overtrading definition

Answer 17

Producing so much that the business can’t afford to pay its suppliers until customers pay

Question 18

Fixed capital / capital expenditure definition

Answer 18

Money used to buy non-current assets

Question 19

Allocating capital expenditure definition

Answer 19

Setting aside enough money to stop non-current assets from wearing out

Question 20

Net realisable value definition

Answer 20

The amount the business could get by selling the stock right now in its current state

Question 21

Reasons assets lose value:

Answer 21

• Wear and tear
• Break down
• Old fashioned

Question 22

Why are suppliers interested in a business’ working capital and liquidity?

Answer 22

If a business is more liquid they are likely to offer them better credit

Question 23

Disadvantages of balance sheets:

Answer 23

• It us only a snapshot so may not be relevant in the future
• PESTLE must be considered
• Lots of assets does not mean it is doing well, it depends on how they were paid for
• If bad debts are included it may be misleading