Accounting - Balance Sheet EU

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					Accounting
  The Balance Sheet




                      1
Clive Vlieland-Boddy
 FCA FCCA MBA
    EADA 2008




                       2
4 Fundamental Accounting
Concepts again!
   Going Concern - That the business will
    continue and not be liquidated.
   Accruals (or Matching) - That income is
    matched with expenditure. You match the sale
    with the cost of that sale.
   Consistency - What you did last year you do
    this. Otherwise figures would be meaningless.
   Prudence - Caution is essential. Note
    “Prudence must prevail”
                                                3
What is a Balance Sheet
   It is like a photograph taken on a given date
    of the financial position of the company.


……”Click”…….

                                                    4
What is a Balance Sheet



    FLASH

                          5
Need Picture of assets
liabilities and equity
The Accounting Equation
The Assets = Liabilities + Shareholders ( Owners)Equity.




       Assets                = Liabilities
                            & Equity

                                                           7
A Balance Sheet…..

Assets          Liabilities
Current         Current
Non Current     Non Current
Investments
Intangibles     Shareholders Equity
                Shares
                Retained Earnings



                                      8
An Asset
   Has a present or future economic value.
   It MUST be worth something. If NOT it is
    NOT an asset
  Assets
There are 4 basic categories of Assets.
 Current Assets

 Non Current Assets

 Intangibles

 Investments




                                          10
    Current Assets

   Current Assets - Those that are used for the day
    to day trading of the company and are expected
    to be consumed within 12 months.
   E.g.: Accounts Receivable and Inventories.




                                                  11
Current Assets Should be...
   Expected to be realised, consumed, sold or
    settled within 12 months.
   Held primarily for trading purposes or short
    term.
   Is Cash or Cash Equivalents which are not
    restricted.



                                                   12
Current Assets
   Bank Balances and Cash
   Marketable Securities
   Accounts Receivable
   Prepayments
   Inventories
Cash or Cash Equivalents
   If a bank account is held and there is a
    positive balance then this is treated as a
    current asset.
   If it is negative it is a current liability.
   Cash Equivalents means investments
    immediately convertible into cash such as a
    bank deposit account.


                                                   14
Marketable Securities
   Very Short Term and highly liquidable
    investments.
Current Assets
Accounts Receivable ( DEBTORS)
 A firm often sells goods where the buyer pays
  for them some time later. The firm has to
  recognise that it has sold something but as
  yet not been paid for it.
 This therefore represents an asset of the firm
  being money that it will receive from the sale
  of goods or services that it has already made.
 Note that any of these that are likely to fail to
  pay, should be deducted and recognised as a
  bad debt in the Income Statement.
                                                  16
Accounts Receivable
   Money due from customers.
   Sometimes called Debtors.
   Bad Debts are those that are unlikely to be
    recovered.
Current Assets
Inventories ( Stocks & WIP)
   Companies that manufacture goods or buy
    and sell will normally have to acquire the
    goods to be sold before selling them. They
    normally hold these until a customers
    acquires them. These goods are called
    inventories or stocks.
   There are several different classes of
    Inventories based on the state of the goods.

                                                   18
3 Classes of Inventories
   Raw Materials - The basic materials before
    any production.
   Work in Progress - where goods are being
    converted to finished items.
   Finished Goods - Items ready for sale.




                                                 19
Valuation of Inventories
   The lower of Cost or Net realisable value.
   Must adjust for any further costs required to
    enable these to be sold.
   For example. A car dealer has a new BMW in
    stock. It cost €20,000. However it is now
    only worth €18,000 and requires €800 to be
    spent on it to enable it to be sold. Inventory
    value = 18,000 – 800 = 17,200.
Slow Moving or Obsolete
   Must adjust for these
LIFO vs FIFO
   Last In First Out is where you account for
    stocks on the basis that the last item acquired
    is the first item out. This tends to under value
    the stocks as it means that the remaining
    stocks are the oldest which probably costs less
    when purchased.
   First In First Out is where you expect to
    consume the oldest items first. This is now
    generally accepted as more reasonable but the
    USA still use LIFO.
                                                 22
LIFO vs FIFO
   FIFO now the only accepted method under
    IFRS.
   See 10.2.7
Coffee Break
   10.3.1
Sundry Prepayments
   These represent items which have been paid
    in an accounting period but at the Balance
    Sheet date, have not been fully consumed.
    Here the Accruals(Matching) concept requires
    us to recognise this.
    Example: The company pays its 12 months
    vehicle insurance one month before the year
    end. You would accept to charge one month
    in the Revenue Statement and take 11
    months in The Balance Sheet so as to match
    against next years income.
                                               25
Prepayments
   Example:
   A Company pays its annual insurance for the 12
    months from 1st December 2006 of £12,000. At
    the 31st December, it has only consumed 1/12
    of this expenditure. The matching concept
    requires to match 1/12 in the closed year and to
    take the remaining 11/12 forward to match it
    against the next year. These non-consumed
    expenditures are classified as prepayments in
    Current Assets in the Balance Sheet.
Coffee Break
   10.5.1
Non Current Assets NCA’s
(Fixed Assets)
   Tangible
   Intangible
   Investments
    Tangible (NCA)

   Those that are held to enable the company to
    function. E.g. Plant and Equipment vehicles and
    buildings.




                                                 29
Depreciation
   NCA’s lose value as they are used. This loss
    in value is called depreciation. (We will return
    to this later)
Coffee Break
   10.7.1
    NCA’s Intangible Assets

   Like Goodwill, know how, trade marks & Patents.
    ( we will deal with later)




                                                32
Intangibles Generally
   Have value but value can be easily lost.
   Should be written off as quickly as possible.
Investments
   A company may acquire shares in other
    companies. These will represent assets and
    be shown in the Balance Sheet as
    Investments. Normally held for a long time.
   Short Term Investments in say Government
    Stocks can be shown as Current Assets so
    long as they can be easily converted into
    cash.

                                                  34
Accounting For Leased Assets
   Financing Lease - Essentially a way of buying
    the asset. Substance over legal form.
   Operating Lease - Just a daily or weekly hire.
    (Short term)
Leased Assets
   Some leased assets are essentially a loan
    and in real terms the asset is under the
    ownership of the lessee ( The person who
    uses the asset) These are called Financing
    Leases and should recognise the real
    issues… ie “substance over legal form”
    Finance leases should be capitalised.
   Operating leases are basic, normally short
    term, rental agreements. They should not be
    capitalised.                              36
Financing Leases
   Treated as if it had been bought by the
    company.
   The asset is shown in the Balance Sheet
    along with the total commitments outstanding
    to the leasing Company
Coffee Break
   10.10.1
Liabilities
   Represent an obligation of the business
    arising from past events. The settlement of
    this is expected to result in an outflow from
    the recourses of the business having itself
    created economic benefit.
   It we are never going to write out a cheque
    then it is not a liability.


                                                    39
Liabilities
A liability is what its name says. It is a
  responsibility of the enterprise and is some
  form of debt. There are 2 essential
  categories of these.
 Current Liabilities -

 Non Current Liabilities -




                                                 40
Current Liabilities
Those that are to be settled within 12 months.
  E.g.
 Accounts Payable

 Bank overdraft.

 Dividends Payable

 Tax Payable

 Sundry Accruals

 Current Proportion of Long Term Loans
Accounts Payable (Creditors)
   Most companies buy materials and supplies
    on credit paying for them weeks or even
    months later. Thus the accounts must show
    that there is a liability outstanding when the
    goods are received / Invoiced, until they are
    actually paid for.




                                                     42
Dividends Payable
   The amount that is due to be paid as
    dividends to shareholders.
Tax Payable
   Current Tax payable to the government.
Tax & Deferred Tax
   Tax is divided into two categories. Tax that
    has to be paid to the government and tax that
    is delayed due to certain concessions or tax
    incentives.
   Tax that is payable to the government is
    shown as a current liabilities as this will have
    to be paid quickly.
   Deferred tax is a Non Current Liability as it is
    not payable for at least 12 months.
                                                   45
Deferred Tax
   Tax that is not payable within 12 months.
Example:

ABC Limited
Extract Income Statement
                                         2006      2005

EBIT                                    650,000   575,000
Deduct: Interest                         60,000    50,000
Profit Before Tax                       590,000   525,000
Deduct: Taxation at 40% (See Note 23)   236,000   210,000
Deduct: Dividends                       100,000    90,000
Retained Reserves For Year              136,000   120,000

Note to The accounts No 23.

Taxation
                                         2006      2005

Mainstream Tax Liability                156,000   180,000
Deferred Taxation                        80,000    30,000

Total Tax Provision                     236,000   210,000
Sundry Accruals
   In order to comply with the Matching
    Concept, it is necessary to make adjustments
    for items that have yet to be invoiced but are
    due and need to be matched with the year or
    accounting period to which they relate.
   Example: A company receives its 3 month
    telephone bill one week after the year end.
    The whole bill relates to the closed year.
    This would need to shown as an Accrual.
                                                 48
Coffee Break
   11.2.1
Non Current Liabilities
Those that are due to be settled after one year.
E.g.
 Loans with maturity more than 12 months
  away.
 Mortgages

 Deferred Tax
Long Term Loans
Loans repayable more than 12 months away
  are treated as Non Current Liabilities. Any
  portion repayable within 12 months will be
  shown as a current liability.




                                                51
Proportion of Loans repayable
within 12 months
Example:
 A Company has a bank loan of $90k
  repayable over the next 9 years by equal
  installments of $10k. Thus in Current
  Liabilities would be $10k and in Non Current
  Liabilities would be $80k.
Current & Non Current
Liabilities

   Loan of €90,000 Repayable over 9 years by
    equal installements




10,000      80,000
Current     Non Current Laibility
Liability
Dividends payable.
Dividends which are due and payable within 12
  moths are normally shown separately under
  current liabilities.




                                            54
Provisions
   More than 50% likely we will have to write out a
    cheque.
   Must show as a liability in the Balance Sheet.
   Examples:

         Warranty

         Bad Debts (Accounts Receivable that might well not
          pay)

         Proposed Management Bonuses or Audit Fees.

         Litigation where the outcome is likely to be adverse..
Contingencies
   Possible obligation from past events not
    within the companies control.
   The present obligation may not have any
    financial effect or as yet not determinable.
   If a contingency is more that 50% likely to
    happen then it is a provision and needs to be
    included in the Balance Sheet.


                                                56
Contingencies - Accounting
Treatment
   Should be disclosed in a note to the
    accounts.
   A description given even in the notes.
   Reasons for any uncertainty.
   Attempt to quantify.




                                             57
Pension Liabilities
   Most companies separate these out.
   If still there then should show as Non Current
    Liability except the amounts payable to
    retired staff within next 12 months which are
    shown as Current Liabilities.
Shareholders Equity
Limited Liability Companies require investors to
  provide capital. Initially in the form of shares
  and then by leaving their profits in the firm.
  ( Called retained earnings)




                                                 59
Share Capital & Reserves
   The companies capital structure is initially
    written down in its foundation documents
    called Memorandum & Articles of
    Association.
Different Types of Shares
   Common or Ordinary Shares - These are the
    real owners of the company ( Once you have
    50% plus you own and control the company)
   Preference Shares - Basically a loan.
    Normally no voting rights.
Authorised, Issued and Paid up
   Authorised is the number and amount that
    the Memorandum permits. This can be
    changed upwards, normally by application to
    the Court.
   Issued is the number of shares actually
    purchased.
   Paid up is the number actually paid for.
   Difference is that sometimes shares can
    remain unpaid.
Shareholders Funds
Retained Earnings
The company will not normally pay all its profits
  to the shareholders as dividends. They will
  retain some to fund the activities and growth
  of the business. There profits not distributed
  are called “Retained Earnings”.




                                                63
Share Premium
   Shares sold by the company at a premium.
   The premium is collected here.
Share Premium
   Where shares are say $1 each, often a
    company will sell them for say $1.50 or more.
    This premium is shown as a separate item in
    the Shareholders Equity.
Revaluation Reserve
   NCA’s can be revalued.
   If they are, the increase should be recorded
    here.
   Note that under IFRS these reserves cannot
    be distributed as dividends.
Capital Reserves
   These are revaluation reserves generated by
    re-valuing a Non Current Asset or the
    disposal of a Non Current Asset.
Treasury Stock
   Shares that the company has bought back.
   Many issues over how to show these in the
    financial statements.
After Balance Sheet Events
Activities occurring after the Balance Sheet
  date may or may not require adjustment or a
  note. Such events may be favourable or not.
 Either provide evidence of conditions that
  existed at the Balance Sheet date or
 indicate conditions that occurred after the
  Balance Sheet date but make a material
  effect to the possible future outcome.

                                                69
Off Balance Sheet Finance
Examples
 Sale and lease back of a Fixed Asset along
  with its associated borrowings to a Special
  Purpose Vehicle (SPV) e.g.Enron!!!
 Buying loss making companies via a SPV
  until they become profitable.



                                                70
Creative Accounting
This represents manipulating the figures for a
 desired result.
Example: a company may try to improve the
 picture so as to inflate share price or gain
 beneficial loan arrangements. Alternatively, if
 tax was high, then possibly reducing profits
 so as to pay less tax. Often such
 adjustments are done at the year end by
 issuing invoices early or delaying until the
 next year.                                    71
Coffee Break
   11.10.1
ABC Limited
Balance Sheet as at 31st May 2006
Current Assets                     Current Liabilities
Accounts Receivable     200,000    Accounts Payable          150,000
Inventories             150,000    Tax Payable                50,000
Bank Balance            125,000    Current Proportion of Loan 25,000
Total Current Assets    475,000    Total Current Liabilities 225,000

Non Current Assets                 Non Current Liabilities
Plant & Equipment        100,000   Bank Loan                 250,000
Less: Depreciation       -50,000
Total Non Current Assets 50,000    Shareholders Equity
                                   Shares                    25,000
Investments              25,000    Retained Earnings         50,000
                                   Total Shareholders Equity 75,000
Total Assets            550,000    Total Liabs & Equity     550,000    73
Consolidated Balance Sheet
   Where you have a group of Companies, the
    parent will consolidate its subsidiaries into its
    own accounts.
   It will add all the groups assets and liabilities
    together.
   Minority Interest is the % that is not owned by
    the group.
Stanley tools
   www.stanleyworks.com




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77
Quiz Time
   Exercise 1.




                  78
Exercise 2
   Lets work this together




                              79
Prepare for next class
   Exercise 3. We will work this together when
    we next meet.




                                                  80
Group Study Research
You should each look at 2 companies and evaluate for
  qualitative purposes. (See end of Chapter 6) This
  should include the following:
   Industry Overview
   Risk management
   Corporate Governance
   Corporate Social Responsibility
   Transparency and clarity of the company financial information
   Strategy – clear sustainable and achievable
   Management strengths
   Readability of the reported information
   Additional shareholder tools and reports.
Group Study Research
Once you have reviewed these 2 companies each,
  you should aim to eliminate one on the grounds
  that it fails for certain reasons against benchmarks
  that you have set. ( See end of chapter 6).
Then as a group you should evaluate these
  companies preparing a 30-40 minute presentation
  which will be made on the final session at the end
  of this course.
The End…
   to be continued…..




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