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The Profit and Loss Statement

VIEWS: 24 PAGES: 39

									                                    GEM2508




A Finance Survival Kit


           GEM2508
        Frederick H. Willeboordse
        frederik@chaos.nus.edu.sg


                                              1
                          GEM2508




Lecture 2


      The Balance Sheet




                                    2
                                          GEM2508



Today’s Lecture

 Basic Excel

 Understand the elements of the Balance
 Sheet

 Use MS Excel to make a simple Balance
 Sheet




                                                    3
                                           GEM2508



Excel Basics – references
                   In the last lecture we had
                   seen that one can use the
                   address of a cell in a
                   formula.
                   In other words, Excel
                   refers to the contents of a
                   cell when doing its
                   calculations.

                   There are two types of
                   references: absolute and
                   relative.

                                                     4
                                                               GEM2508



Excel Basics – references
                                 Absolute references are
                                 indicated by the ‘$’ sign.

                                 Hmm, the result is the
                                 same?


                                  A relative reference indicates
                                  the direction and distance of
                                  the cell referred to. I.e. if we
An absolute reference refers      type a formula in B3 and refer
to the actual address on the      to cell B2 what Excel actually
spread sheet. I.e. $B$2 means:    understands is: “Look at the
“Look at the contents of the      contents of the cell right above
cell with address B2:             the current cell.
                                                                         5
                                                                GEM2508



Excel Basics – references
Why is this distinction important? It is important when
copying and pasting.
If you just have a number or a word, copying and pasting
will do what one expects.
                              Select the two cells and press
                              CTL-c.

                              Go to the destination and press
                              CTL-v.




                                                                          6
                                                                GEM2508



Excel Basics – references
But what if you have a formula?


                             Select the cell with the formula
                             and press CTL-c.

                             Go to the destination and press
                             CTL-v.




           The number changed!!

                                                                          7
                                                                   GEM2508



Excel Basics – references




Here we used a relative reference   Here we used an absolute reference
and consequently, after copying     and consequently, after copying and
and pasting the formula changed     pasting the formula remained the
automatically.                      same.
                                                                             8
                                                          GEM2508



Excel Basics – references
Absolute and relative references can be as with regards
to columns, rows or both.




                                                                    9
                                                          GEM2508



Excel Basics – references
Absolute and relative references can be as with regards
to columns, rows or both.




                                                                10
                                                        GEM2508



Excel Basics – fonts etc.
There are many ways to improve the visual impact of the
spreadsheet.
Font Sizes
Font Types
Font Faces


                                                   Add pictures
Set the
background                                         Etc. etc.
color of cells,
add borders to
cells.




                  Autoshapes   Lines & Arrows
                                                                  11
                                                          GEM2508



Elements of a Balance Sheet

A balance sheet, also called the statement of financial
position, lists:
                       $ IN
   • Assets
                              $ OUT
   • Liabilities
                                      ?
   • Owners Equity
as of a specific date. It gives an idea of what the company is
worth.
Let us now look at these terms in more detail.


                                                                 12
                                                          GEM2508



Elements of a Balance Sheet
                      $ IN
Assets
Assets are all those things a company owns which are of
value to the business.
Assets can be tangible like e.g. a manufacturing plant,
computers or cash in the bank.
   Tangible assets like cash or goods for sale that can
   easily (i.e. within an accounting year) be converted
   into cash are called current assets while other assets
   like properties and equipment are called fixed assets.
Assets can also be intangible like e.g. copyrights.             13
                                                         GEM2508



Elements of a Balance Sheet

Liabilities                 $ OUT


Liabilities are all those things for which the company
eventually needs to pay. There are two types of liabilities:
     Current Liabilities need to be paid within one
   accounting year. Examples are: Outstanding rent,
   goods bought on credit.
     Long Term Liabilities are those liabilities which will
   not be paid during the current accounting year.
   Examples are: Long term debts, bank loans.
                                                               14
                                                      GEM2508



Elements of a Balance Sheet

Owner’s Equity               ?


Owner’s Equity is by definition the difference between the
Assets of a company and its Liabilities. Owner’s Equity is
the sum of two parts:
     Contributed Capital is the money that the owners
   invested in the company.
     Retained Earnings are those earnings which were not
   distributed to the owners. These can accumulate to a
   large sum over the years.
                                                             15
                                                           GEM2508



Elements of a Balance Sheet

Let me stress again: A Balance Sheet must balance the
assets, liabilities and owner’s equity.

          Assets – Liabilities = Owner’s Equity

             $ IN      $ OUT

Most commonly, the assets are on top and the liabilities
and owner’s equity on the bottom.

Let’s now have a look at a balance sheet.
                                                                 16
                                                                                GEM2508



Elements of a Balance Sheet
       A    B       C         D     E      F        G
  2
  3        Golden Win Double Dragon International
  4        Balance Sheet
  5
  6        Assets
  7              Cash and Equivalents                   10000
  8              Accounts Receivable                     1200
  9              Inventory                               8300
  10       Total Current Assets                         19500      =G7+G8+G9
  11             Plant and Equipment                      800
  12             Accumulated Depreciation                 500
  13       Net fixed assets                               300      =G11-G12
  14       Total Assets                                 19800      =G10+G13
  15       Liabilities and Owner's Equity
  16             Accounts Payable                        7600
  17             Other Current Liabilities                900
  18       Total Current Liabilities                     8500      =G16+G17
  19             Long Term Debt                          1200
  20       Total Liabilities                             9700      =G18+G19
  21             Common Stock                            6000
  22             Retained Earnings                       4100
  23       Total Shareholder's Equity                   10100      =G21+G22
  24       Total Liabilities and owner's Equity         19800      =G20+G23          17
                                                                              GEM2508



Elements of a Balance Sheet
Beam Me
   2
     A   B       C    D     E     F              G

   Up Golden Win Double Dragon International
   3
   4    Balance Sheet
 Scottie!
   5
    6     Assets
    7           Cash and Equivalents                 10000
    8           Accounts Receivable                   1200
 Is that what you call simple????
    9           Inventory                             8300
    10    Total Current Assets                       19500    =G7+G8+G9
    11          Plant and Equipment                    800
 As often, the scientific method can come in handy Cheer Up!
    12          Accumulated Depreciation               500
    13    Net fixed assets                   =G11-G12  300 
 here.
    14    Total Assets                       =G10+G1319800 
 To paraphrase: Divide and Conquer!
    15
    16
          Liabilities and Owner's Equity
                Accounts Payable     7600             Let’s first
 Or: Look at things bit by bit, present them clearly clean this up
    17                                900
                Other Current Liabilities
    18    Total Current Liabilities  8500   =G16+G17
 and understand…
    19          Long Term Debt       1200
                                                      a bit …
    20    Total Liabilities                           9700    =G18+G19    and then
    21          Common Stock                          6000                 look at it in
 (Still feel like drowning? I should have chosen a
    22          Retained Earnings                     4100
                                                                           more detail
    23    Total Shareholder's Equity         =G21+G2210100 
 different background!)
    24                                       =G20+G23
          Total Liabilities and owner's Equity       19800                …           18
                                                                                  GEM2508



Elements of a Balance Sheet
       A    B      C        D     E         F          G
                                                                              Use the
  3          Golden Win Double Dragon International                           Center and
  4                Balance Sheet, As of Dec 31 2000
                                                                              Merge Button
  5
  6        Assets
                                                                              Change the
  7              Cash and Equivalents                 10000                   Font
  8              Accounts Receivable                   1200
  9              Inventory                             8300                   Underline
  10       Total Current Assets                       19500      =G7+G8+G9   before the
  11             Plant and Equipment                    800                   subtotals
  12             Accumulated Depreciation               500
  13       Net fixed assets                             300      =G11-G12
  14       Total Assets                               19800      =G10+G13
                                                                              Make the
  15       Liabilities and Owner's Equity                                     totals bold
  16            Accounts Payable                       7600
  17            Other Current Liabilities               900
  18       Total Current Liabilities                   8500      =G16+G17
                                                                              Make the
  19            Long Term Debt                         1200
  20       Total Liabilities                           9700      =G18+G19    main items
  21            Common Stock                           6000                   italic
  22            Retained Earnings                      4100
  23       Total Shareholder's Equity                 10100      =G21+G22
  24       Total Liabilities and owner's Equity       19800      =G20+G23                  19
                                                         GEM2508



Some Notes
  Note how the top and bottom parts balance

  Presentation indeed makes a big difference. In a sense
  ‘design’ is an important ingredient of financial
  modeling. After all, what is the use of great information
  if no-one understands it?




Now, let us look at the items in the balance sheet one
by one.
                                                               20
                                                                       GEM2508



Elements of a Balance Sheet
                                                        $ IN
Assets – Current Assets
  Cash and Cash Equivalents
      Cash is all the cash the company has, be it in bank accounts or in the
      cash box. Cash Equivalents are short term investments that can be
      converted to cash with no or very little delay. Examples of Cash
      Equivalents are: Money Market Investments, Government Bonds.
  Accounts Receivable
      Most businesses do not immediately receive payment for (some or
      all) of the goods or services they sell. Assuming that payment will
      indeed be made in the near future, a receivable account is an asset.




                                                                               21
                                                         GEM2508



Elements of a Balance Sheet

Assets:Total Current Assets
In this case, of course, its just the sum of ‘Cash and
Equivalents’ and ‘Accounts Receivable’, but there could
be many more ‘current’ items.

Total current assets is an important item since it indicates
how much money the company has to run its business.




                                                               22
                                                                      GEM2508



Elements of a Balance Sheet

Assets: Fixed Assets
  Plant and Equipment
      In order to run a business one usually will need to buy some equip-
      ment (even when one is in the service business) like e.g. machines
      and computers. The total cost price of the bought equipment is listed
      in this item (note, the fact that equipment becomes worth less is
      accounted for in the next item).
  Accumulated Depreciation
      Naturally, when one uses equipment it will get old and thus become
      worth less. It is therefore necessary to subtract a certain amount
      from the original equipment value every year. Since one would like
      to keep the original value listed above, one needs to ‘accumulate’
      i.e. sum up all the previous year’s depreciations.
                                                                              23
                                                         GEM2508



Elements of a Balance Sheet

Assets: Net Fixed Assets
In this case the net fixed assets are ‘Plant and Equipment’
minus ‘Accumulated Depreciation’, but there could be
many more items.

Note that having a lot of fixed assets does not necessarily
mean that the company is ‘rich’. It is also important to
realize that fixed assets do not provide cash for running the
business (though they could be use as collateral for a
loan).

                                                                24
                                                        GEM2508



Elements of a Balance Sheet

Assets: Total Assets
Total Assets = Current Assets + Net Fixed Assets

Note: While total assets in a sense represent the current
value of the business, they do not necessarily represent the
resale value or the liquidation value of the business.

The total assets are the value of the business as seem from
the perspective of a continuation of the currently operating
business.

                                                               25
                                                                       GEM2508



Elements of a Balance Sheet
                                                                 $ OUT
Liabilities: Current Liabilities
• Accounts Payable
       Just as there are accounts receivable, there are also accounts
       payable. Businesses usually do not need to pay immediately upon
       delivery but have e.g. 30 or 60 days ‘credit-terms’.
       In other words, ‘accounts payable’ are unpaid bills due soon.


• Other Current Liabilities
       All the liabilities which are due within one accounting year and
       which are not separately listed (in this case only accounts payable)
       are lumped together here. Examples are: unpaid salaries, interest,
       short term loans.

                                                                              26
                                                           GEM2508



Elements of a Balance Sheet

Liabilities: Total Current Liabilities

The total current liabilities are an important indicator of
how much money a company will need in the near future.

If the total current liabilities are much bigger than the total
current assets great caution is warranted.




                                                                  27
                                                                       GEM2508



Elements of a Balance Sheet

Liabilities: Long Term Liabilities
• Long Term Debt
       While in daily life having debts (especially credit card debts!) is
       usually not a good thing, the proper use of long term loans is an
       essential part of many business activities. It is for example very
       rare that a company has enough cash to build a new state of the art
       manufacturing plant. The idea is of course that you earn more than
       you pay in interest. (This is somewhat similar to buying a condo
       with a mortgage).
• Other Long Term Liabilities
       All other liabilities which do not need to be returned within one
       accounting year and which are not separately listed. E.g. Royalties,
       asbestos claims.
                                                                              28
                                                        GEM2508



Elements of a Balance Sheet

Liabilities: Total Liabilities
Total Liabilities = Total Current + Long Term Liabilities
Note: If the Total Liabilities exceed the Total Assets, the
company is almost certainly in some sort of danger. But
there are exceptions to this! (Especially companies in new
hot industries like e.g. dot.coms or genetics).




                                                              29
                                                                        GEM2508



Elements of a Balance Sheet

Liabilities: Shareholder’s Equity
• Common Stock
       When a corporation is set up or when it needs money and desires to
       do so, it can issue common stock. The amount received is entered
       under this item. Note that the value printed on the stock certificate
       may be quite different from what one actually pays.
• Retained Earnings
       At the end of an accounting year, a company can have a profit or
       a loss. The profit or loss (in case of loss, naturally with a minus
       sign) is added to the retained earnings.
       The retained earnings sum up all the profits and losses since the
       inception of the company (minus paid out dividends).

                                                                               30
                                                          GEM2508



Elements of a Balance Sheet

Liabilities: Total Shareholder’s Equity

This is the amount the company ‘owes’ its shareholders.

Note that from an operational point of view, these debts
have no impact on the daily running of the business since
they do not need to be repaid.




                                                                31
                                                       GEM2508



Elements of a Balance Sheet

Liabilities: Total Liabilities and Owner’s
Equity
As such this item is mainly a cross check for the accuracy
of the balance sheet. It must be exactly the same number
as the total assets or something is wrong!




                                                             32
                                                                              GEM2508



A Simple Balance Sheet
       A    B      C        D     E         F          G

  3          Golden Win Double Dragon International                 May be, it’s
  4
  5
                   Balance Sheet, As of Dec 31 2000
                                                                    quite simple
  6        Assets                                                   after all!
  7              Cash and Equivalents                 10000
  8              Accounts Receivable                   1200
  9              Inventory                             8300
  10       Total Current Assets                       19500      =G7+G8+G9
  11             Plant and Equipment                    800
  12             Accumulated Depreciation               500
  13       Net fixed assets                             300      =G11-G12
  14       Total Assets                               19800      =G10+G13
  15       Liabilities and Owner's Equity
Same
  16            Accounts Payable                       7600
  17            Other Current Liabilities               900
  18       Total Current Liabilities                   8500      =G16+G17
  19            Long Term Debt                         1200
  20       Total Liabilities                           9700      =G18+G19
  21            Common Stock                           6000
It’s a Balance Sheet
  22
  23
                Retained Earnings
           Total Shareholder's Equity
                                                       4100
                                                      10100      =G21+G22
  24       Total Liabilities and owner's Equity       19800      =G20+G23          33
                                                                               GEM2508



A Simple Balance Sheet
        A    B      C        D     E         F          G

   3          Golden Win Double Dragon International
   4                Balance Sheet, As of Dec 31 2000                  May be, it’s
   5
   6        Assets
                                                                      quite simple
Sum7              Cash and Equivalents                 10000          after all!
   8              Accounts Receivable                   1200
   9              Inventory                             8300
   10       Total Current Assets                       19500      =G7+G8+G9
Equals
   11
   12
                  Plant and Equipment
                  Accumulated Depreciation
                                                         800
                                                         500
   13       Net fixed assets                             300      =G11-G12
   14       Total Assets                               19800      =G10+G13
   15       Liabilities and Owner's Equity
   16            Accounts Payable                       7600
   17            Other Current Liabilities               900
   18       Total Current Liabilities                   8500      =G16+G17
   19            Long Term Debt                         1200
   20       Total Liabilities                           9700      =G18+G19
   21            Common Stock                           6000
   22            Retained Earnings                      4100
   23       Total Shareholder's Equity                 10100      =G21+G22
   24       Total Liabilities and owner's Equity       19800      =G20+G23          34
                                                                              GEM2508



A Simple Balance Sheet
       A    B      C        D     E         F          G

  3          Golden Win Double Dragon International
  4                Balance Sheet, As of Dec 31 2000                  May be, it’s
  5
  6        Assets
                                                                     quite simple
  7
  8
                 Cash and Equivalents
                 Accounts Receivable
                                                      10000
                                                       1200
                                                                     after all!
  9              Inventory                             8300
Sum
  10
  11
           Total Current Assets
                 Plant and Equipment
                                                      19500 
                                                        800
                                                                  =G7+G8+G9

  12             Accumulated Depreciation               500
  13       Net fixed assets                             300      =G11-G12
  14       Total Assets                               19800      =G10+G13

Equals
  15
  16
           Liabilities and Owner's Equity
                Accounts Payable                       7600
  17            Other Current Liabilities               900
  18       Total Current Liabilities                   8500      =G16+G17
  19            Long Term Debt                         1200
  20       Total Liabilities                           9700      =G18+G19
  21            Common Stock                           6000
  22            Retained Earnings                      4100
  23       Total Shareholder's Equity                 10100      =G21+G22
  24       Total Liabilities and owner's Equity       19800      =G20+G23          35
                                                                              GEM2508



A Simple Balance Sheet
       A    B      C        D     E         F          G

  3          Golden Win Double Dragon International
  4                Balance Sheet, As of Dec 31 2000                  May be, it’s
  5
  6        Assets
                                                                     quite simple
  7
  8
                 Cash and Equivalents
                 Accounts Receivable
                                                      10000
                                                       1200
                                                                     after all!
  9              Inventory                             8300
  10       Total Current Assets                       19500      =G7+G8+G9
Sum
  11
  12
                 Plant and Equipment
                 Accumulated Depreciation
                                                        800
                                                        500
  13       Net fixed assets                             300      =G11-G12
  14       Total Assets                               19800      =G10+G13
  15       Liabilities and Owner's Equity
Equals
  16
  17
                Accounts Payable
                Other Current Liabilities
                                                       7600
                                                        900
  18       Total Current Liabilities                   8500      =G16+G17
  19            Long Term Debt                         1200
  20       Total Liabilities                           9700      =G18+G19
  21            Common Stock                           6000
  22            Retained Earnings                      4100
  23       Total Shareholder's Equity                 10100      =G21+G22
  24       Total Liabilities and owner's Equity       19800      =G20+G23          36
                                          GEM2508



A Simple Balance Sheet


    Hey!
    This is like in Ally McBeal.

    Sum …. Equals
    Sum …. Equals
    Sum …. Equals

    We should start singing a song. Any
    good rappers around?

                                                37
                                                                               GEM2508



A Simple Balance Sheet
       A    B      C        D     E         F          G

  3          Golden Win Double Dragon International
  4                Balance Sheet, As of Dec 31 2000
  5                                                               Guess what:
  6
  7
           Assets
                 Cash and Equivalents                 10000
                                                                  The liabilities side
  8              Accounts Receivable                   1200       is the same.
  9              Inventory                             8300
  10       Total Current Assets                       19500      =G7+G8+G9
  11             Plant and Equipment                    800
  12             Accumulated Depreciation               500
  13       Net fixed assets                             300      =G11-G12
  14       Total Assets                               19800      =G10+G13

  Sum
  15
  16
           Liabilities and Owner's Equity
                Accounts Payable                       7600
  17            Other Current Liabilities               900
  18       Total Current Liabilities                   8500      =G16+G17
  19            Long Term Debt                         1200I think you’ll get the
Equals
  20       Total Liabilities                           9700  
                                                           picture …
                                                                 =G18+G19
  21            Common Stock                           6000
  22            Retained Earnings                      4100
  23       Total Shareholder's Equity                 10100      =G21+G22
  24       Total Liabilities and owner's Equity       19800      =G20+G23           38
                                                    GEM2508



Key Points of the Day
   The Balance Sheet provides a snapshot of the
   assets and liabilities of a company.
   The Balance Sheet is one of the most important
   financial statements.

Remember:
Assets – Liabilities = Owner’s Equity
   $ IN         $ OUT

And again:
Assets – Liabilities = Owner’s Equity
                                                          39

								
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