Financial Statements of Limited

Companies - Balance Sheet

Financial Statements of Limited

Companies - Balance Sheet

 learning objectives

financial statements

the three key financial statements

the main elements of the balance sheet the main elements of the profit and loss account

the main elements of the cash flow statement

Session Summary (1) Session Summary (1)

 a typical horizontal balance sheet format

capital and reserves or shareholders’ equity

liabilities

the relationship between risk and return assets

a vertical format balance sheet

valuation of assets

Session Summary (2) Session Summary (2)

 

explain the differences in accounting treatment of capital expenditure and revenue expenditure

identify the financial information shown in the financial statements of a company: balance sheet; profit and loss account; cash flow statement

construct simple financial statements

outline the structure of the balance sheet of a limited company

classify the broad balance sheet categories of shareholders equity; liabilities; assets

Learning Objectives (1) Learning Objectives (1)

 

outline the alternative balance sheet formats

prepare a balance sheet

evaluate some of the alternative methods of asset valuation

appreciate the limitations of the conventional balance sheet

Learning Objectives (2) Learning Objectives (2)

 

Capital Expenditure and Revenue Expenditure

Capital Expenditure and Revenue Expenditure

Revenue expenditure relates to expenditure on those items where the full benefit of making that expenditure is received within the current accounting period

Capital expenditure relates to the cost of acquiring, producing or enhancing fixed assets, the full benefit of which is received within future accounting periods

Limited companies are required to periodically prepare three main financial statements:

balance sheet

profit and loss account

cash flow statement  

Financial Statements (1)

Financial Statements (1)

Financial statements are required for

the shareholders

the Registrar of Companies

and are also used by, for example

analysts

potential investors

customers

suppliers 

Financial Statements (2)

Financial Statements (2)

The Three Key Financial Statements

The Three Key Financial Statements

The Main Elements of the Balance Sheet

The Main Elements of the Balance Sheet

The Main Elements of the Profit and Loss

Account

The Main Elements of the Profit and Loss

Account

The Main Elements of the Cash Flow

Statement

The Main Elements of the Cash Flow

Statement

A Typical Horizontal Balance Sheet Format

A Typical Horizontal Balance Sheet Format

capital

share premiums

retained earnings  

Capital and Reserves or Shareholders’

Equity

Capital and Reserves or Shareholders’

Equity

current, or short-term, liabilities short-term financial debt trade creditors (or accounts payable) accruals long-term liabilities long-term financial debt long-term trade creditors (or accounts payable) provisions 

Liabilities Liabilities

The Relationship Between Risk and

Return

The Relationship Between Risk and

Return

fixed assets tangible fixed assets intangible fixed assets financial assets current assets  

Assets (1) Assets (1)

 stocks debtors (or accounts receivable) cash prepayments 

Assets (2) Assets (2)

A Vertical Format Balance Sheet (1)

A Vertical Format Balance Sheet (1)

fixed assets (FA) + current assets (CA)

– current liabilities (CL) – long-term liabilities (LTL)

=equity (E)

FA + (CA – CL) – LTL = E 

A Vertical Format Balance Sheet (2)

A Vertical Format Balance Sheet (2)

 

 valuation of items within the balance sheet is covered by the Companies Act 1985/1989, accounting concepts and standards

problems arise from differences in approach, and alternative methods used to value the different categories of assets and liabilities: 

Valuation of Assets (1) Valuation of Assets (1)

 

 

fixed assets

brand names

goodwill

research and development costs

stocks

debtors

foreign currency transactions

 

There are limitations to the conventional balance sheet arising not only from the fact that it is an historical document, but from inconsistencies in its preparationdue to

differences between companies and industries

employment of various asset valuation methods

off-balance sheet financing

window dressing

Valuation of Assets (2) Valuation of Assets (2)