Unit (41)

Uses of funds and the balance sheet :- Assets are the resources used by business.- A company will use the fund it earns to purchase

assets which add value to a company.- Most assets are physical in nature and are used in

production.- However there are some assets which don’t fall into

this category and are called intangible assets.- The balance sheet provides a summary of all business

assets and their value.- Assets are value at their original costs less a

deduction for depreciation.

Uses of Funds

Fixed assets :- Resources with a life of more than one year, are called fixed assets.- Fixed assets can be used again and again until they wear out.- Some fixed assets, like land don’t depreciate, although they have to be repaired.- Fixed assets are divided into, tangible, intangible, and financial assets.

Tangible assets :- Tangible assets are physical assets that can be touched.- The most long term or the least liquid of these assets (the most difficult to run into cash) appear at the top of the list of fixed assets on the balance sheet.( 1 ) Land and property can either be freehold or leasehold.-Freehold is owned outright by the business.- It is valued on the balance sheet at it’s original costs, less depreciation.- In the past, accountants have advised many companies to revalue their land and property, taking into account the more.

( 2 ) Inflation in order to reflect accurately a (true and fair view) of the company.-Leasehold and property, any capital amount paid for the lease appears separately as leasehold property.- This amount is written off over the period of lease.- The value of the lease is reduced by an amount each year as it depreciates.( 3 ) Fixed assets which are not land or property are referred as plant, machinery, and equipment.-They are valued at original costs less depreciation.- Large companies have vast amounts of these assets.- The balance sheet will, in this case, not list separate assets but give only a total.

Intangible assets :- Some fixed assets are not tangible, but are still valuable .- Income – generating resources.( 1 ) Good will :-Over many years of trading, companies build up good will.-They gained a good reputation, which means that customers will use their services or purchase their products.- If the company is to be sold in the future, some value need to be placed on this good will and included in the purchase price.- Form an accountant’s point of view, good will is equal the amount by which, the purchase price of a business exceeds the net assets.

( 2 ) Patents, Copyrights and trademarks :- If a company or on individual invents or develops a unique product a patent can be obtained from the patent office.- The patent is a license which prevents other firms from coping the product.- Copyright prevents the re-use of published works such as books, plays, films an music without the author’s consent.( 3 ) Research and development :-Normally research and development costs are classified as revenue expenditure.- If a project is expected to earn income in the future, its costs may be recorded as capital expenditure, and included as an intangible assets in the balance sheet.- The cost are written of ever the period when income is generated.

( 4 ) Brand names :- Many companies enjoy successful brand names.- The amount the successful brand name is estimated to be worth should be included as intangible asset on the balance sheet.- When an intangible asset is written off it is described as amortization rather than depreciation.

Financial assets :- They are often called investments in the balance sheet.- They usually refer to shares hold by one company in other companies.- If the shareholding in a particular company is more than so per cent, then that company is classified as a subsidiary.- If the holding is between 20-50 per cent then the company is described as an associated company.- Any holdings of less than 20 per cent are called trade investments.- some companies hold share in other companies to earn income.- Other companies hold shares to diversify in order to reduce risks.

-Companies also buy firms in the same line of business to exploit economies of scale (Horizontal integration).- They may also seek to buy out their suppliers or distribution network (vertical integration) .- Other financial investments might include government bonds or deposits of foreign currency.- All financial assets are listed at cost in the balance sheet.

Current assets :Short term assets which can be changed into cash within one year are called current assets.Current assets fall into :( 1 ) Stokes :- Most business hold stock of finished goods.- They are classed as current assets, because the business hops to sell them within twelve months.- Work-in-progress, is also classed as stock- It represents partly finished goods.- Raw materials and components are included in the current assets.

( 2 ) Debtors :- When a sale is made it is common to receive payment at a later date.- Any amounts owing by these customers at the end of financial year are listed as debtors in the balance sheet.- In order to speed up the payment of bills some firms offer cash discounts.( 3 ) Prepayments :-A prepayment is a sum, such as insurance, rent, or uniform business rate, which is paid in advanced.- At the end of the financial year, any service which has been paid, but not fully consumed is listed in the balance sheet as a prepayment.

( 4 ) Cash at bank :- Most business deposit their takings in a bank.- From the bank account various expenses are paid for.- If the bank balance is positive at the end of the trading year, the amount will be shown as a current assets in the balance sheets.( 5 ) Cash in hand :- Many business have cash on their premises. This is called petty cash.- Cash is used to pay for small or unexpected transactions.- Cash at bank and cash in hand represent the most liquid resources.- Too much cash means business opportunities may be wasted as the money could be invested on other assets.- Too little cash may prevent the business from making urgent purchases.

Liquidity:-Ii refers to the speed or ease with which assets can be converted into cash without suffering any capital loss.- In the balance sheet the least liquid assets are listed at the top and the most liquid are shown at the bottom.- Fixed assets like land buildings tend to be very illiquid.- It takes a long time to be sold.- The most illiquid assets is a highly specialized item of machinery since demand will be limited.- Some fixed assets may be much easier to sell and are there fore more liquid tike vehicles and standard tools and equipment.

- The least liquid of the current assets is stock, because sales can never be guaranteed.- The liquidity of raw materials stocks can vary.- Non-specialized materials like coal will be more liquid than specialized components since they are easier to sell.- Debtors are more liquid than stocks, because goods have been sold, and the business has legally entitled to payments.- When firms can not pay, the debt has to be written off (known as bad debts).- Cash at bank and cash in hand are the most liquid assets of all.

Asset structure :-It refers to the amount of capital employed in each category of asset.- Asset structure will vary according to the nature of the business.- Manufacturing companies will tend to have a large amount of capital tied up in plant, machinery and equipment.- Construction firms will have a significant amount of work-in-progress.- Businesses which face seasonal demand may hold large stocks of finished goods at a particular times of the year.- In the retail trade, public houses and restaurants will have very few debtors or even none.

- Fixed assets are the productive assets of a business, so firms will want to invest as much of their capital as possible in these.- Some capital must be kept in current assets to fund day-to-day expenditure.- Some firms exist with very little capital, emplyed in fixed assets.- Retailers often have a large proportion of current assets if they rent premises.Company law and the balance sheet :-According to the British law, certain information should be included in the balance sheet (see page 86) .- The legal requirements attempts to make company accounts standard and help to protect the shareholders.- The legislation does not place any unnecessary financial or administrative burden on the company and does not affect it’s decision making.