A2 Business Resource

1. Do Now - Define the following key
terms

2. Using financial data to measure
and assess performance (Part 3)

3. Learning Objectives
By the end of this lesson you should be able to:
1. Understand the structure of a balance sheet.
2. Understand how balance sheets are used to assess
performance and potential.
3. Understand how to select, calculate and interpret
financial ratios to assess performance.

4. Basic principles of a balance sheet
Accurate balance sheets must obey the following principle:
all assets must equal all liabilities
Which means that:
where money
where money
has been must equal
came from
spent
Why is it so crucial assets and liabilities balance?

5. 1) Non-current assets (fixed assets)
Fixed assets are those which the
business actually owns and which are
therefore ‘fixed’ into the company.
Include buildings and furniture fittings,
machinery and company vehicles.
Cost a lot of money and represent a large investment for
the business.
last for a long period of time.
Can be sold to increase capital (i.e. the money invested
in the business).
Fixed assets are those that have a useful life in
excess of one year.

6. 2) Current assets
Current assets are those which the business holds temporarily
or that are always changing on a day-to-day basis. Including
inventories (stock), cash or trade receivables (debtors).
For example:
A shop, the value of the stock is a current
asset.
An interior designer working on a job for a
client, the work in progress is a current asset.
The final main types of current asset are customers who owe
money for goods bought Trade Receivables (debtors) and also
the amount of money in a company’s current bank account.

7. 3) Current liabilities
Current liabilities, like current assets, are short-term and always
changing. However, this is money that a business actually owes.
Common current liabilities include:
short-term loans
Trade Payables (Creditors)
bank overdrafts
share dividend payments.
Current liabilities are those that are expected to be
paid back in one year.

8. 4) Non-current liabilities (Long term liabilities/
loans)
Non-Current liabilities relate to money owed to be paid back
over a longer period of time.
Common non-current liabilities include:
Mortgages
Loans
Current liabilities are those that are to be
paid back over a longer period of time.

9. Asset or liability?

10. 5) Total Equity
The total amount if money being utilised in the business from
share capital and retained profit.
Share capital – money which
shareholders have invested in
the business.
Reserves – profit from previous
years which has been retained
to finance future developments.
Profit and loss account – money kept back from the
current year’s profits (the net profit).
Why is the money personally invested by a business a
liability and not an asset?

11. Let’s look at the structure of
balance sheets

12. Practice!
Although you won’t need to create a balance
sheet in an examination it is good for you to
understand how they work.

13. Reading a balance sheet
Both the balance sheet and the profit and loss
account show the ‘health’ of the business.
Shareholders, customers, suppliers,
employees and other stakeholders
will be interested in both types of
account.
They will want to see how the
business is getting its money (e.g.
whether it is borrowing large
amounts of money or whether it is
using profits) and how well and on
what this money is used.

14. Important balance sheet considerations
It is important for companies to bear in mind the following
considerations when preparing balance sheets:
Fixed assets – is there enough money secured in items
which could be sold to raise capital? Or is there too large
an investment in fixed assets and not enough liquidity
(the ability to meet current liabilities) in the business?
Cash in bank – can a short-term crisis be covered?
Net current assets/liabilities – if this figure is negative, the
business hasn’t enough money to pay all its debts in a
reasonable time, if required.
Shareholders’ funds – are these increasing?
Shareholders will want their investment to grow.