2. What is Balance Sheet?
• Balance Sheet is the snap shot of financial strength
of any company at any point of time. (usually within
12 months) It gives the details of the assets and the
liabilities of the company. Understanding balance
sheet is very important because it gives an idea of
the financial strength of the company at any given
point of time.
3. Major Heads of Balance Sheet
Liabilities:-
1. Share Capital
2. Reserve and Surplus
3. Secured Loans
4. Unsecured Loans
5. Current Liabilities and
Provisions
Assets :-
1. Fixed Assets
2. Investments
3. Current Assets, Loans of
Advances
4. Miscellaneous Expenses
5. Profit and Loss Account
(Debit balance)
8. Notes & Understanding of
Financial Statements
Additional information provided in a company's financial
statements. Notes to the financial statements report the
details and additional information that are left out of the
main reporting documents, such as the balance sheet and
income statement.
9. Note 1. Share capital
Funds raised by issuing shares in return for cash or other
considerations. The amount of share capital a company has can change
over time because each time a business sells new shares to the public in
exchange for cash, the amount of share capital will increase. Share
capital can be composed of both common and preferred shares.
Also known as "equity financing".
11. Reserves and surplus:
At the end of an accounting period the company
may decide to transfer part of the profits to a reserve
and retain the balance in the profit and loss account.
The reserve created out of profits transferred from
profit and loss account is called general reserve. The
balance in the profit and loss account is called a
surplus and will be shown under this head in the
balance sheet.
The company can use the general reserve for various
purposes including issue of bonus shares to
shareholders and payment of dividend when profits
are insufficient.
12. Note 3. Long Term Borrowing
Loans and financial obligations lasting over one year. Long-term debt for
a company would include any financing or leasing obligations that are to
come due in a greater than 12-month period. Such obligations would
include company bond issues or long-term leases that have been
capitalized on a firm's balance sheet.
14. Fixed Asset:
An asset not readily convertible to cash that is used in the
normal course of business. Examples of fixed assets include
machinery, buildings, and fixtures. A firm whose total assets
are made up primarily of fixed assets is in a less liquid financial
position, thus entailing greater risk of a big tumble in profits if
its revenues fall.
15. Note 5. Investment
An investment involves the choice by an individual or an organization
such as a pension fund, after some analysis or thought, to place or
lend money in a vehicle, instrument or asset, such as property,
commodity, stock, bond, financial derivatives (e.g. futures or options),
or the foreign asset denominated in foreign currency, that has certain
level of risk and provides the possibility of generating returns over a
period of time.
16. Note 6. Current Asset
A balance sheet account that represents the value of all assets that
are reasonably expected to be converted into cash within one year in
the normal course of business. Current assets include cash,
accounts receivable, inventory, marketable securities, prepaid
expenses and other liquid assets that can be readily converted to
cash.
17. Note 7. Inventories
The raw materials, work-in-process goods and completely finished
goods that are considered to be the portion of a business's assets
that are ready or will be ready for sale. Inventory represents one of
the most important assets that most businesses possess, because
the turnover of inventory represents one of the primary sources
of revenue generation and subsequent earnings for the company's
shareholders/owners.
18. Note 8. Sundry Debtors
SUNDRY DEBTOR :
is an entity from who amounts are due for goods sold or services
rendered or in respect of contractual obligations. Also termed: debtor,
trade debtor, and account receivable.
more understandable detail
Miscellaneous small or infrequent customers that are not assigned
individual ledger accounts but are classified as a group.
19. Note 9. Cash & Bank Balance
bank balance:
A bank balance is that amount which is actually deposited in any of
the bank. or the amount which has been credited in your bank
account.
cash balance:
It is an amount which is there in your hand. i.e., it is otherwise called
as cash in hand. or else we can say that the hot cash which is there
with you right now is called as a cash balance.
20. Note 10. Loan & Advance
Loans and advances are general descriptions of debt obligations
companies owe and must show on their balance sheet as part of total
liabilities. Formal contracted loans are typically designed as "notes
payable" on a balance sheet, whereas advances or purchases on
credit are recorded as accounts payable.
21. Note 11. Current Liabilities
Current liabilities are the debts a company owes which must be paid
within one year. They are the opposite of current Assets. Current
liabilities includes things such as short term loans, accounts payable,
dividends and interest payable, bonds payable, consumer deposits,
and reserves for Federal taxes.
22. Note 12. Other Income
Income for a company that comes from anything other than its
ordinary operations. Other income includes items such as interest
from the company's bank accounts, profit from the sale of a fixed
asset, and so forth. Other income is not recurring and, as a result, is
not included in some calculations of profit or loss.
23. Note 13. Revenue from Operations
Income derived from sources related to a company's everyday
business operations. For example, in the case of a retail business,
inventory sales generate operating revenue, whereas the sale of a
warehouse does not. Instead, the latter sale is considered to be an
unexpected, or "one-time", event.
24. Note 14. Employee benefit expenses
Employee benefits are indirect means of compensating workers;
employees receive these benefits above and beyond their wages.
Unlike wages alone, benefits foster economic security and stability by
insuring beneficiaries against uncertain events such as
unemployment, illness, and injury. Furthermore, some benefit
programs serve to protect the income and welfare of families.
25. Note 15. Finance Cost
Finance costs are also known as “financing costs” and “borrowing
costs”. Companies finance their operations either through equity
financing or through borrowings and loans. These funds do not come
for free. The providers of funds want reward for against there funds.
26. Note 16. Other Expenses
Other Expense accounts reflect expenses that your company incurs
that are not related to your normal business operations its is general
expenses. These expenses are grouped with Other Income accounts
at the bottom of the Profit and Loss report.
27. Understanding Cash Flow
Statement
• What is Cash Flow Statement.?
A cash flow statement is important to business because
it can be used to assess the timing, amount and
predictability of future cash flows and it can be the basis
for budgeting. A cash flow statement can answer the
questions, “Where did the money come from?” and
“Where did it go?”
28. • Focuses on the liquidity of a business, by
measuring cash inflows and outflows.
• Three components of cash flow
statement:
– +/- Operating Cash Flows
– +/- Investing Cash Flows
– +/- Financing Cash Flows
29.
30. Operating Activities
Outflows:
• Pay wages
• Purchase inventory
• Pay other expenses
• Pay interest
• Pay taxes
Inflows:
• Sale of goods
• Revenue from
services
• Interest income
31. Investing Activities
Inflows:
• Sale of fixed assets
• Sale of investment
securities
Outflows:
• Purchase of fixed
assets
• Purchase of
investment
securities
32. Financing Activities
• Inflows:
• New loans
• Sale of stock
Outflows:
• Repayment of loans
• Repurchase of a firm’s
own securities (treasury
stock)
• Payment of dividends
33. Financing Activities
• Inflows:
• New loans
• Sale of stock
Outflows:
• Repayment of loans
• Repurchase of a firm’s
own securities (treasury
stock)
• Payment of dividends
34. Methods For preparing Cash flow
Statement
The Direct Method
The first method performed will be the direct method of calculating cash
flow. This method combines information from both the Income
Statement and the Cash Flow worksheet we created using the Balance
Sheet.
The Indirect Method
The second method used to calculate the Cash Flows from Operating
Activities is referred to as the Indirect Method. Using the Indirect
Method, cash flows from Operating Activities are reported by adjusting
net income for revenues, expenses, gains, and losses that appear on the
income statement but do not have an effect on cash.