Balance sheet

Question 1

What is a balance sheet

Answer 1

Balance sheet is one of the annual financial statements that all limited liability companies are legally required to produce for auditing purposes

Question 2

what are assets

Answer 2

the possessions of a business that have a monetary value. Assets are owned by a business.

Question 3

what are liabilities

Answer 3

are the debts of a business
i.e., the money owed to others

Question 4

what are the two things that a balance sheet needs to show

Answer 4

-the organisation’s sources of finance, including borrowed funds (part of its liabilities) and equity (internal finance invested by shareholders, and any accumulated retained earnings).

-the organization’s uses of finance, i.e. how the business has used its sources of finance, such as the purchase of non-current assets (also referred to as non-current assets) and current assets for trading.

Question 5

Non-current assets (fixed assests

Answer 5

Is any asset used for business operations (rather than for selling) and is likely to last for more than 12 months from the balance sheet date.

Question 6

What are current assets

Answer 6

refers to cash or any other liquid asset that is likely to be turned into cash within twelve months of the balance sheet date.

Question 7

what are the three main types of current assets

Answer 7

Cash, Debtors, Stocks

Question 8

Cash

Answer 8

This is the money that is held in the business or at the bank.

Cash is the most liquid of current assets and is easily accessible to the business

Question 9

Debtors

Answer 9

Refers to people or other organisations that owe money to the business as they have purchased goods on credit.

The usual trade credit period is between 30 and 60 days.

Question 10

Stocks

Answer 10

goods that a business has available for sale, per time period. Stocks are intended to be sold as quickly as possible, thereby generating cash for the business.

Question 11

What are the three types of stocks

Answer 11

-Raw materials
- work in progress
- Finished goods

Question 12

Non-current liabilities (long-term liabilities)

Answer 12

are the long-term debts of a business, falling due after 12 months of the balance sheet date

Question 13

Total liabilities

Answer 13

the sum of current liabilities and non-current liabilities
i.e the sum of all the monies owed by the business

Question 14

Net assets

Answer 14

refers to the overall value of an organisations assets after all its liabilities are deducted

Question 15

What are the two equations of net assets

Answer 15

Net assest = Total assets – Total liabilities

Net assets = (Non-current assets + Current assets) – (Current liabilities + Non-current liabilities)

Question 16

Definition of equity

Answer 16

refers to the value of the owners’ stake in the business, i.e. what the business is worth at the time of reporting the balance sheet.

Question 17

what is equity comprised of

Answer 17

1. share capital
2. Retained earnings

Question 18

what is the equation of Retained earnings

Answer 18

Retained earnings= Opening retained earnings + profit after interest and tax for current period - Dividends for current period

Question 19

Limitations of balance sheet (3)

Answer 19

-Balance sheets are static documents, the financial position of a business might be very different in subsequent positions
-The figures are only estimates of the value of assets and liabilities. The market value of an assest is not necessarily the same as its book value
-No universal format of a balance sheet, different business will produce different formats (different assets and liabilities) - makes it difficult to compare the financial position of different firms
-Not all assets of a business included in a balance sheet, esp intangible assets and the value of human capital