Financial management
Literature summary
The balance sheet demonstrates the assets that are used by the company and the funds
that are related to those assets. Relating to one point in time. There is a differentiation
between fixed and current assets and liabilities. An analysis of changes in the balance sheet
(from opening and closing balance sheets) provide crucial information about the company’s
activities over the period of time in question. Also called a statement of financial position.
- Current assets: everything that is turned into cash in one year.
- Non-current assets: long-term, such as buildings.
- Equity: assets - liability.
- Non-current liabilities: long-term.
- Current liabilities: you want to pay this back within one year.
The income statement (also called profit and loss account) measures gains and losses
from normal and abnormal operations over time. It measures total income and deducts total
costs. It specifies your assets. It is not possible to alter a value here without altering a
corresponding value in the balance sheet.
The cash flow statement shows when chaques are received and cheques are issued.
Specifies how cash flows.
Assets: things owned. A list of items of continuing value on which money has been spent.
Uses of money. Most likely to be overestimated by: accounts receivable, inventory and
prepayments.
Liabilities: amounts owed. A list of the various sources of this same sum of money. Sources
of money. Most likely to be undervalued: accruals and accounts payable.
These two have to add up.
Current assets → short term, will convert back into cash within 12 months.
- Inventories (stock)
- Accounts receivable (trade debtors)
- Cash
- Miscellaneous current assets (short term assets not included elsewhere)
Fixed assets → long investment, more than 12 months.
- Intangibles: all assets that do not have physical presence, main item is goodwill.
1
, Financial management
- Net fixed assets: large, expensive, long-lasting physical items that are required for
the operations of the business. Land, buildings, machinery and equipment. The
standard method of valuation is to take the original cost and deduct accumulated
depreciation.
- Long-term investments: holdings of shares in other companies for trading purposes.
Only investments in non-consolidated companies are shown here.
Current liabilities → short term, to be paid within 12 months. Have a strong parallel
relationship with current assets.
- Accounts payable (creditors)
- Short term loans (bank overdrafts and interest-bearing short term debt)
- Miscellaneous (e.g. accrued payments, interest, current tax and dividends due)
Long term liabilities → long term loans, such as mortgages, debentures, term loans, bonds
etc that have repayment terms over one year.
- Medium term: 3-5 years
- Long term: 5-20 years
Owners’ funds / ordinary funds / common funds / Equity → all claims by the owners of
the business. Where fortunes are made and lost. Assets minus liabilities.
- Issued common stock: issuing for a cash consideration is the main mechanism for
bringing owners’ capital into the business (nominal value, book value and market
value)
- Capital reserves: to cover all surpluses accruing to the common stockholders that
have not arisen from trading. (revaluation of fixed assets, premiums on shares issued
at a price in excess of nominal value and currency gains on balance sheet items,
some non-trading profits etc.) Cannot be paid out easily as dividends
- Revenue reserves: surpluses generated by normal trading profit (revenue reserves,
general reserves, retained earnings etc.)
Total assets → fixed assets and current assets combined. Also equals the liabilities and
equity.
Capital employed → fixed assets + investments + inventory + accounts receivable + cash,
less accounts payable and short-term loans. Current and fixed assets minus current
liabilities. Can also be calculated as the equity and long-term loans combined. Only includes
long-term funds. CE represents the long-term foundation funds of the company. Looking at
performance, there are concerns to ensure that profits are sufficient to keep the foundation
intact.
Net worth → equity with the following values: issued common stock, capital reserves and
revenue reserves. The shareholders’ stake in the company is the sum of total assets minus
the loans to third parties.
2
, Financial management
Working capital → current assets minus current liabilities. Represents the day-to-day
operating liquidity available to a business. Also calculated as equity and long-term liabilities
minus the fixed assets.
The profit and loss account is a bridge between the opening and closing balance sheets of
an accounting period. To identify the total revenue earned and the total costs incurred. The
difference between these two is the operating profit.
Total revenue earned → the amount of invoice and there is no problem with its accurate
identification.
Total costs incurred → two rules with identifying costs:
- the costs that relate directly to the revenue (e.g. direct cost of sold goods)
3
Literature summary
The balance sheet demonstrates the assets that are used by the company and the funds
that are related to those assets. Relating to one point in time. There is a differentiation
between fixed and current assets and liabilities. An analysis of changes in the balance sheet
(from opening and closing balance sheets) provide crucial information about the company’s
activities over the period of time in question. Also called a statement of financial position.
- Current assets: everything that is turned into cash in one year.
- Non-current assets: long-term, such as buildings.
- Equity: assets - liability.
- Non-current liabilities: long-term.
- Current liabilities: you want to pay this back within one year.
The income statement (also called profit and loss account) measures gains and losses
from normal and abnormal operations over time. It measures total income and deducts total
costs. It specifies your assets. It is not possible to alter a value here without altering a
corresponding value in the balance sheet.
The cash flow statement shows when chaques are received and cheques are issued.
Specifies how cash flows.
Assets: things owned. A list of items of continuing value on which money has been spent.
Uses of money. Most likely to be overestimated by: accounts receivable, inventory and
prepayments.
Liabilities: amounts owed. A list of the various sources of this same sum of money. Sources
of money. Most likely to be undervalued: accruals and accounts payable.
These two have to add up.
Current assets → short term, will convert back into cash within 12 months.
- Inventories (stock)
- Accounts receivable (trade debtors)
- Cash
- Miscellaneous current assets (short term assets not included elsewhere)
Fixed assets → long investment, more than 12 months.
- Intangibles: all assets that do not have physical presence, main item is goodwill.
1
, Financial management
- Net fixed assets: large, expensive, long-lasting physical items that are required for
the operations of the business. Land, buildings, machinery and equipment. The
standard method of valuation is to take the original cost and deduct accumulated
depreciation.
- Long-term investments: holdings of shares in other companies for trading purposes.
Only investments in non-consolidated companies are shown here.
Current liabilities → short term, to be paid within 12 months. Have a strong parallel
relationship with current assets.
- Accounts payable (creditors)
- Short term loans (bank overdrafts and interest-bearing short term debt)
- Miscellaneous (e.g. accrued payments, interest, current tax and dividends due)
Long term liabilities → long term loans, such as mortgages, debentures, term loans, bonds
etc that have repayment terms over one year.
- Medium term: 3-5 years
- Long term: 5-20 years
Owners’ funds / ordinary funds / common funds / Equity → all claims by the owners of
the business. Where fortunes are made and lost. Assets minus liabilities.
- Issued common stock: issuing for a cash consideration is the main mechanism for
bringing owners’ capital into the business (nominal value, book value and market
value)
- Capital reserves: to cover all surpluses accruing to the common stockholders that
have not arisen from trading. (revaluation of fixed assets, premiums on shares issued
at a price in excess of nominal value and currency gains on balance sheet items,
some non-trading profits etc.) Cannot be paid out easily as dividends
- Revenue reserves: surpluses generated by normal trading profit (revenue reserves,
general reserves, retained earnings etc.)
Total assets → fixed assets and current assets combined. Also equals the liabilities and
equity.
Capital employed → fixed assets + investments + inventory + accounts receivable + cash,
less accounts payable and short-term loans. Current and fixed assets minus current
liabilities. Can also be calculated as the equity and long-term loans combined. Only includes
long-term funds. CE represents the long-term foundation funds of the company. Looking at
performance, there are concerns to ensure that profits are sufficient to keep the foundation
intact.
Net worth → equity with the following values: issued common stock, capital reserves and
revenue reserves. The shareholders’ stake in the company is the sum of total assets minus
the loans to third parties.
2
, Financial management
Working capital → current assets minus current liabilities. Represents the day-to-day
operating liquidity available to a business. Also calculated as equity and long-term liabilities
minus the fixed assets.
The profit and loss account is a bridge between the opening and closing balance sheets of
an accounting period. To identify the total revenue earned and the total costs incurred. The
difference between these two is the operating profit.
Total revenue earned → the amount of invoice and there is no problem with its accurate
identification.
Total costs incurred → two rules with identifying costs:
- the costs that relate directly to the revenue (e.g. direct cost of sold goods)
3
