5a : limited company balance sheets and working captial

Explain the two types of expenditure

• Capital expenditure : is the money spent on items that can be used over and over again. Are usually expensive.

( e.g. machinery, factories)

• the money spent on items that can be used up quickly. (Such as wages, petrol, stationary materials)

Define and explain what a balance sheet is

A balance sheet shows a business’s assets (what they own) and their liabilities (what they owe) and how they are financed

Identify and explain why balance sheets are important to stakeholders

• Employees : employees may want to see the business accumulated profits and how They are distributed

• bankers : banks look into business long term finance to see whether they are capable for a loan

• Suppliers : suppliers may need to know if they can be paid back

Identify the five parts that a balance sheet contains

• Fixed assets : what a business owner and will benefit for over 1 year (e.g. buildings, machinery, brand names)

• Current assets : what the business owns that will be used up within 1 year (e.g. stock, debtors,money)

• Current liabilities : what the business owner and has to pay back within 1 year (e.g. creditors, tax)

• Long term liabilities : is what the bussines owes creditors for over one year (e.g. loan, mortgages)

• Equity capital : is the amount of long term money given to bussines to purchase assets (e.g. retained profits, shareholder funds)

Explain what net assets and non current assets are

• net assets are calculated by adding fixed assets and current assets then subtracting with your current liabilities and long term liabilities

• net current assets (also called working capital) is the difference between current assets and current liabilities

Explain the advantages of a balance sheet

• balance sheets are an indication of the business value, for instance, it can be presented to a bank to gain a loan

• It shows whether the company can pay day to day bills ( does it have enough net current assets )

• It provides a summery of the business assets capital and liabilities

Outline and explain the disadvantages of a business using a balance sheet

• the assets stated on the balance sheet can worth less in real life

• Most balance sheet do nor include intangible assets such as brand names

• Balance sheets only represent the day they are constructed ,which makes it less useful as some days are better than others

• Many balance sheets lack in detail, the figures are just totals and are not broken down

Explain and analyses why working capital may be important to business

Working capital shows the financial strength of a business over a short term ,the higher level of working capital the more abnle they can meet demands from creditors and be able to pay for everyday things such ass wages ,overheads and operating costs

• too little working capital could lead to :

-Not carrying enough stock to keep the business going

-Not being able to pay bills on time (like wages and if no wages employees wont work )

• too much working capital could lead to :

-Too much stock being held which could increase cost because of storage costs

-Company could be allowing debtors to much time to by them back

What are the factors that affect how much working capital a business needs ?

• a business with high sales volume tend to have costs of sales for example clothing shops and department stores. There for they will need more working capital

• The more credit a business offers the more working capital it will need to prevent a cash flow crises

• Inflation increases the cost of wages and stock so business need more working capital to prepare for an inflation increase

• When a business expands it needs more working capital to avoid over trading

explain why business may need to calculate depreciation

• businesses need to calculate depreciation so that their profits are not overestimated, this could lead to damaging the companies image since they would be window-dressing which could prevent them from acquiring a bank loan

• without calculating depreciation, fixed assets may be overestimated

• calculating depreciation will allow them to know when to purchase new fixed assets to replace the old ones

define depreciation

depreciation is an estimate of how much a fixed asset has decreased in value over time