Balance Sheet 2

Question 1

what is the bottom “half” of the balance sheet

Answer 1

where the money came from

Question 2

what are the two types of shares that make up share capital

Answer 2

preference shares and ordinary shares

Question 3

what is a preference share

Answer 3

receives dividends first
don’t have voting rights

Question 4

what are ordinary shares

Answer 4

dividends issued after preference shares
have voting rights
dividend amount is a management decision - based on profits

Question 5

what can happen to the profit

Answer 5

dividends, retained or reinvested

Question 6

what is retained profit

Answer 6

common reserve - profit retained (from all previous years) to fund the company’s growth
retained profit is a revenue reserve

Question 7

what are reserves

Answer 7

they are a source of finance - but they are not cash (large reserves does not mean large cash)
shows where the money came from

Question 8

what is revaluation reserve

Answer 8

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

Question 9

capital reserve

Answer 9

cannot be used for dividends

Question 10

revenue reserve

Answer 10

can be used for dividends

Question 11

what is share premium

Answer 11

the excess a company may issue a share at above the share nominal value (other reserves)
share premium is a capital reserve

Question 12

nominal value

Answer 12

the share price when a company starts
minimum a share can be issued for

Question 13

current market value

Answer 13

varies on the stock market

Question 14

what is shareholders’ equity

Answer 14

share capital + all reserves
it is the total shareholder investment in the company, reserves belong to shareholders

Question 15

what are non - current liabilities

Answer 15

long term obligations to pay others (more than one year) eg bank loans

Question 16

when are non-current liabilities moved to current liabilities

Answer 16

they are reported in current liabilities when they are due in less than one year

Question 17

what equation describes the capital employed

Answer 17

capital employed = share capital + reserves + non-current liabilities

Question 18

why would the purchase price of a business be more than the value in the balance sheet

Answer 18

brand recognition, key staff, reputation, customer loyalty, trade secrets, databases

Question 19

what is goodwill

Answer 19

the excess above the value on the balance sheet
difficult to value but it is an intangible asset and subjective to constant change

Question 20

when can you report that goodwill exists

Answer 20

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

Question 21

assets =

Answer 21

liabilities + capital

Question 22

non-current assets + current assets - current liabilities =

Answer 22

non-current liabilities + capital

Question 23

what is current assets - current liabilities

Answer 23

the working capital

Question 24

what are the net assets

Answer 24

total assets - total liabilities = capital

Question 25

what is the working capital cycle

Answer 25

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)

Question 26

what is invested into the working capital cycle

Answer 26

cash not invested in non-current assets

Question 27

what is the cash used for

Answer 27

cash will purchase raw materials
if bought on credit this is a current liability called payables

Question 28

what happens to the raw materials

Answer 28

turned into work in progress and finished goods inventories

Question 29

that happens to the finished goods

Answer 29

sold and recorded as revenue
if sold on credit this is a current assets called receivables

Question 30

what other expenditure is there in the wcc

Answer 30

cash spent on wages, electricity, fuel etc
costs of storing inventories

Question 31

what do payables (creditors) provide

Answer 31

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

Question 32

what is the working capital if current assets are more than the current liabilities

Answer 32

net current assets

Question 33

what is the working capital if the current assets are less than the current liabilities

Answer 33

net current liabilities

Question 34

what can be done if there’s not enough cash

Answer 34

get more capital, more loans, collect more from debtors, delay paying creditor, reduce costs, increase sales

Question 35

what type of business has a short working capital cycle

Answer 35

retailer such as a supermarket
inventories are not held for long and they have few raw materials
receivables are small

Question 36

what type of business has a long working capital cycle

Answer 36

large manufacturer because raw materials take a long time to be converted to a finished good

Question 37

what is the case for a service provider

Answer 37

don’t sell inventories
cash mostly goes into expenses of providing the service
customers may be debtors (current assets)

Question 38

what is capital expenditure

Answer 38

spending on long term items
capital spent on non-current assets (depreciation applied - deducted from the assets)

Question 39

what is revenue expenditure

Answer 39

spending on shorter term items (wages bills, general expenses) day to day expenses reported in the income statement

Question 40

how do you value inventory

Answer 40

lower of cost and net realisable value