balence sheet Flashcards
what is a balance sheet
a balence sheet is a snapshot of a businessesfinaicial position at a particular moment in time
involves businesses assets what they own and liabilities- what they owe
what are fixed assets
land, buildings, machinery, vehicles, highly illiquid, often last oner a year, help businesses long term success/function effectively in the long term , used to produce output
value of fixed assets chances
- tangible assets- value influenced by usage
- intangible assets value is influence by brand value
when tangible assets are reduced- depreciation
value of fixed assets must be accurate of assets value so investors are not misled/ company is over valued
what are current assets
includes stock, debtors, bank, cash
highly liquid- easily converted into cash
debtors = customers who haven’t paid
useful life less tan 12 months
needed to help a business operate in the short term
change value often due to trading
categories of inventory = raw materials, work in rogree and finished goods - highest liquidity
some types of finished goods are perishable less liquid then others that have longer shelf life
least liquid = work in progress
what are current liabilities
includes trade creditors and bank overdrafts debts normally paid within. year normal part of business practice
long term liabilities
debt paid over a year mortgages/ bank loans
net assets
( current assets+ fixed assets) - ( current liabilities + long term liabilities )
shareholders funds
money invested into the business by the owners through the sale of shares
also includes retained profits- may use to help business grow
and reserves- held cash normally used for buying assets
working capital
current assets- current liabilities
working capital is the money required for day to day operations
good measure of businesses short term financial health providing indication if business holds enough current assets to cover current liabilities
if a firm holds more current liabilities than current assets they may struggle to repay debts leading to closure
investors may use this to asses operational efficiency
e.g. holding too much cash- not using efficiently missing out on investing into e.g. assets
why do we use depreciation
- prevent assts being over valued on the balence sheet
-providing potential investors with a misleading view of the financial strength
-overtime machines become worn and obsolete if full value of assets is included in balence sheet - over value which would be seen as window dressing which could lead to negative reputation, not able to borrow money- unreliable
