7.2a - Balance Sheets Flashcards
Balance sheet definition
A measure of the accumulated value of a business since it began
What can balance sheets be used to judge?
- Business’ worth
- Debts
- Sources of finance
- Changes over time
Equity formula
Non-current assets + current assets - non-current liabilities - current liabilities
Non-current assets definition
Assets that have been part of the business for more than a year
Current assets definition
Assets that have been part of the business for less than a year
Non-current liabilities definition
Liabilities that will be paid back in more than one year
Current liabilities definition
Liabilities that will be paid back in less than one year
Total equity definition
The total of all the money that has been put into the business
Net current assets formula
Current assets - current liabilities
Net assets formula
Non-current assets + net current assets - non-current liabilities
Assets employed formula
Net current assets + non-current assets
Capital employed formula
Total equity + non-current liabilities
Depreciation definition
When assets lose value over time
Working capital definition
The amount of cash, and assets that can be easily turned into cash, that the business has available to pay day-to-day debts
Working capital formula
Current assets - current liabilities
Why would a business need to hold more cash?
- 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
Overtrading definition
Producing so much that the business can’t afford to pay its suppliers until customers pay
Fixed capital / capital expenditure definition
Money used to buy non-current assets
Allocating capital expenditure definition
Setting aside enough money to stop non-current assets from wearing out
Net realisable value definition
The amount the business could get by selling the stock right now in its current state
Reasons assets lose value:
- Wear and tear
- Break down
- Old fashioned
Why are suppliers interested in a business’ working capital and liquidity?
If a business is more liquid they are likely to offer them better credit
Disadvantages of balance sheets:
- 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