Balance Sheet 2 Flashcards
what is the bottom “half” of the balance sheet
where the money came from
what are the two types of shares that make up share capital
preference shares and ordinary shares
what is a preference share
receives dividends first
don’t have voting rights
what are ordinary shares
dividends issued after preference shares
have voting rights
dividend amount is a management decision - based on profits
what can happen to the profit
dividends, retained or reinvested
what is retained profit
common reserve - profit retained (from all previous years) to fund the company’s growth
retained profit is a revenue reserve
what are reserves
they are a source of finance - but they are not cash (large reserves does not mean large cash)
shows where the money came from
what is revaluation reserve
assets can be revalued (eg property)
property value goes up = increase in assets
a revaluation reserve = increase in shareholders equity (other reserves)
revaluation is a capital reserve
capital reserve
cannot be used for dividends
revenue reserve
can be used for dividends
what is share premium
the excess a company may issue a share at above the share nominal value (other reserves)
share premium is a capital reserve
nominal value
the share price when a company starts
minimum a share can be issued for
current market value
varies on the stock market
what is shareholders’ equity
share capital + all reserves
it is the total shareholder investment in the company, reserves belong to shareholders
what are non - current liabilities
long term obligations to pay others (more than one year) eg bank loans
when are non-current liabilities moved to current liabilities
they are reported in current liabilities when they are due in less than one year
what equation describes the capital employed
capital employed = share capital + reserves + non-current liabilities
why would the purchase price of a business be more than the value in the balance sheet
brand recognition, key staff, reputation, customer loyalty, trade secrets, databases
what is goodwill
the excess above the value on the balance sheet
difficult to value but it is an intangible asset and subjective to constant change
when can you report that goodwill exists
goodwill only exists financially when the business is officially purchased
it is not reported in the accounts until then but the current (unreported) value should be reviewed yearly
assets =
liabilities + capital
non-current assets + current assets - current liabilities =
non-current liabilities + capital
what is current assets - current liabilities
the working capital
what are the net assets
total assets - total liabilities = capital
what is the working capital cycle
ongoing movement of cash
a continuous balancing act
cash to invest, buy inventories, produce goods, make sales, get cash from customers (debtors), and paying suppliers (creditors)
what is invested into the working capital cycle
cash not invested in non-current assets
what is the cash used for
cash will purchase raw materials
if bought on credit this is a current liability called payables
what happens to the raw materials
turned into work in progress and finished goods inventories
that happens to the finished goods
sold and recorded as revenue
if sold on credit this is a current assets called receivables
what other expenditure is there in the wcc
cash spent on wages, electricity, fuel etc
costs of storing inventories
what do payables (creditors) provide
they provide a buffer - so that the suppliers can be paid in the future and raw materials can be used before they are paid for
what is the working capital if current assets are more than the current liabilities
net current assets
what is the working capital if the current assets are less than the current liabilities
net current liabilities
what can be done if there’s not enough cash
get more capital, more loans, collect more from debtors, delay paying creditor, reduce costs, increase sales
what type of business has a short working capital cycle
retailer such as a supermarket
inventories are not held for long and they have few raw materials
receivables are small
what type of business has a long working capital cycle
large manufacturer because raw materials take a long time to be converted to a finished good
what is the case for a service provider
don’t sell inventories
cash mostly goes into expenses of providing the service
customers may be debtors (current assets)
what is capital expenditure
spending on long term items
capital spent on non-current assets (depreciation applied - deducted from the assets)
what is revenue expenditure
spending on shorter term items (wages bills, general expenses) day to day expenses reported in the income statement
how do you value inventory
lower of cost and net realisable value
