The Balance Sheet - Capital Employed

Question 1

What is Capital Employed?

Answer 1

• Where all the money came from to create the net worth

- Originally from the shareholders & money loaned to it by other people

Question 2

What is “Share Capital”?

Answer 2

The money put into the business when the shares were originally issued

Question 3

What is one way to raise new capital?

& How is this done?

Answer 3

• Issue new shares

- By having a “Rights Issue” - existing shareholders are offered new shares at a reduced price

Question 4

What are “Retained Profit & Reserves”?

Answer 4

• Shows all the Profit over the years that it retained instead of paying dividends
  (Comes under shareholders funds as profits are really the Shareholders money, they have just decided to leave it in the firm rather than take as dividends)

Question 5

What are the 2 parts of the Capital Employed part of the balance Sheet?

Answer 5

• Shareholders Funds

- Long Term Liabilities

Question 6

What are the two parts to Shareholders Funds?

Answer 6

• Share Capital:
  Money that came from the firms owners
• Retained Profit & Reserves

Question 7

What are “Long Term Liabilities”?

Answer 7

Money Owed to others:
Any debts that will take more than a year to pay off:
-Bank Loans
-Debentures

Question 8

How do you work out Capital Employed?

Answer 8

Add Shareholders funds to long term liabilities
This is equal to Net Assets
eg - All the money the business has got (from shareholders & borrowing) is accounted in Capital Employed

Question 9

How is the Balance Sheet useful to Stakeholders?

Answer 9

They can assess the financial health of the company

The Net Assets shows this, if assets are growing each year, the company is probably healthy

Question 10

Why is it called a Balance Sheet?

Answer 10

Because where the business got it’s money from and what it has done with it balance out exactly