Week 3 - Statement Of Financial Position II Flashcards
The Statement of Financial Position have two forms namely,
the report
formand theaccount form
In the ______, the assets, liabilities and equity
are written in a downward sequence (just like a report).
report form
In the _______,the assets a written on the left side while the liabilities and equity on the
right side (just like an account in the ledger).
Account form
As you may recall, the Accounting Equation was presented last module.
Assets - Liabilities = Capital (or Owner’s) Equity
When you look at the account form of SFP, you will notice that it is patterned
with the accounting equation, such that, the asset accounts are listed on the
left side of the SFP and the liabilities and capital accounts are all listed on the
right side of the company
-read-
This is an essential financial statement and part of a complete
financial report. It can be used to secure financing or take a snapshot of a company’s
current financial state, but it can also be used to evaluate the worth of your company
over time.
Balance sheet
The following equation is a simplified representation of what a Balance Sheet
calculates: the total sum of your company’s assets equals the value of the company’s
liabilities and owner’s equity.
Assets = Liabilities + Owner’s Equity
As with any math equation, you can play around with the equation to isolate one
category. Most business owners and investors use the following equation to
calculate the value of the company’s equity.
What is the equation for owners equity
Owner’s Equity = Assets – Liabilities
Assets, money, investments and products the business owns that can be converted
into cash: These are what put companies in the financial positive. A thriving
company should have assets that are greater than the sum of its liabilities; this
creates value in the company’s equity or stock, and opens up opportunities for
financing
-read-
It’s important to list your assets by their liquidity—the facility by which they can be
turned into cash—starting with cash itself and moving into long-term investments
at the end of the list. For the purpose of an annual balance sheet, you can separate
your list between “Current Assets,” anything that can be converted into cash within
a year or less, and “Fixed Assets,” long-term possessions that can be sold or that
retain value down the line, minus depreciation.
-read-
“Current Assets” may include
Cash: All money in checking or savings accounts
Accounts Receivable: Money owed to the business by a client or customer
Inventory: Any products or materials that have already been created or
acquired for the purpose of sale
Pre-paid Insurance: Any payments made in advance for business insurance
coverage or services (this tends to be paid in advance for the year).
“Fixed Assets” may include:
Supplies: Important objects used for business operations (manufacturing
equipment, computers, office furniture, company cars, etc.)
Property: Any office building or land owned by the business
Intangible Assets: Intellectual property such as patents, copyrights,
trademarks and other company rights that retain intrinsic value
Liabilities are the negative part of the equation; these include operational costs, debt
and material expenses. Generally speaking, the lower your liabilities, the greater the
value of your company (and equity) can be. “Current Liabilities” include cash spent,
as well as any debts that must be paid out within one year, while “Fixed Liabilities”
refer to bills due anytime after one year.
-read-
“Current Liabilities” may include:
Accounts Payable: Money owed by a business to its suppliers or partners
Business Credit Cards: Company credit card bills due
Operating Line of Credit: Any money owed to a bank that has extended the
business an operating line of credit
Taxes Owed: Any federal and state taxes owed for one year
Wages and Payroll: Employee compensation, including wages, medical
insurance, etc.
Unearned Revenue: Any revenue garnered from a service or product that
has yet to be delivered to the customer or client
“Fixed Liabilities” may include:
Long-Term Mortgages: Property or building mortgage expenses
Bonds payable: Long-term bonds owed to the government, as well as any
interest paid on the bond (this interest is often semi-annual and can be
added to “Current Liabilities”)
Pension Benefit Obligations: The total amount of money the company owes
to employee pension plans up to the current date
Car Loan: Any long-term car loans on company vehicles (plus insurances
costs)
