Financial Statements 2: Balance Sheet and Cash Flow

What does the balance sheet show?

• what the business owns (assets)

• how it is financed (debt)

• how much equity the owners have in the business

Assets =

liabilities (debt) + owners’ equity

What is the balance sheet?

a snapshot financial statement that captures the company’s assets, liabilities and shareholders equity in the business

Can the balance sheet be used to assess trends?

NO

Define ‘assets’

what company owns

Define ‘liabilities’'

what a business owns

define ‘shareholders’

owners

What can balance sheets be compared to?

previous years’ statements and benchmarked against other similar businesses

What is the cash-flow statement?

amount of money coming into a business and the amount going out

What are the main components of the cast flow statement?

• cash from operating activities

• cash from investing activities

• cash from financing activities

What should cash-flow not be confused with?

profit

Why may a company have poor cash flow?

unpredictable cash in

Why is the cash-flow statement important?

• business knows exactly how much money it has available at any given time

• measure of business strength - helps determine if enough liquidity (cash) to pay expenses

• predict future cash-flows

Define ‘assets’

something that belongs to a business

What are the 2 types of asset?

• current assets

• fixed assets

What are ‘current assets’

consistent of cash/cash equivalents (items that can be converted into cash within 12 months, e.g. trading stock)

What are ‘fixed assets’?

generally items that the business expects to have for over a year (e.g. property and cars)

What are ‘liabilities’?

how much the business owes to others

What are the types of liabilities?

• current liabilities

• long term liabilities

What are ‘current liabilities’?

amounts that must be paid within the next 12 months (e.g. trade creditors, tax, national insurance contributions)

What are ‘long term liabilities’?

amounts that are owed but are not expected to be paid within the next 12 months (e.g. long term car finance, mortgages)

What is ‘balance sheet capital’?

any financial assets a company has

What does ‘balance sheet capital’ include?

• cash equivalents like stocks and investments

• facilities and equipment expected to have a life >12 months

What do brackets on a cash flow statement mean?

negative

Do you want cash flow to be positive and negative?

positive

What does it mean if the number at the end of the cash flow statement is negative?

you ended up with less than you started with

Do you want the number at the end of a cash flow statement to be positive or negative?

positive

What are financial statements?

written records that convey the business activities and the financial performance of a company

What is the balance sheet?

provides another view of assets, liabilities, and stockholders’ equity as a snapshot in time

What is the cash flow statement? (what does it measure?)

measures how well a company generates cash to pay its debt obligations, fund its operating expenses, and fund investments