Balance Sheets Flashcards
Debtors
People who owe the business money (payment has not been received)
Trade Creditors
Businesses to which the business owes money
Drawings
Money withdrawn from the business by the owner
Working Capital
Day-to-day finance available for the upkeep of the business
Capital Expenditure
Spending on new fixed assets
Importance of Working Capital
-Business needs to be capable of paying bills on time
-Businesses need to be able to pay for their raw materials, production may be haltered if they are unable to pay for these
-Businesses are more likely to be able to offer credit if they have good working capital
Balance Sheet Def
A financial statement that records the assets and liabilities of a business at a specific point in time
Fixed Asset
Items owned by the business which do
not change in the short term/they last a long time/used
repeatedly
Current Assets
Assets that are able to convert to cash quickly
Current Liabilities
Money the business owes that they will pay back within 12 months
Non-Current Liabilities
Money the business owes that will take more than 12 months to pay back
Capital Employed
The total money that has been invested into the business such as shareholder funds, owners capital and retained profit.
Working Capital Formula
Current Assets - Current Liabilities
Capital Employed Formula
Total Assets - Current Liabilities
OR
Fixed Assets + Working Capital
How Useful are Balance Sheets?
Shareholders are interested in how the business is doing
Businesses are better advantaged if they know how capable they are of paying off their debts
Current Ratio
Current Assets / Current Liabilities
Current Ratio Usefulness
Above 1 = Strong Liquidity
Below 1 = Weaker Liquidity
However, too high could be an indication of inefficient use of assets
Acid Test
Current Assets - Stock / Current Liabilities
Acid Test Usefulness
Greater than 1:1 indicates strong liquidity.
It assesses the immediate liquidity - which is useful to show the cash the business has in urgent situations.
