CH02

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Financial Statements of
Limited Companies
- Balance Sheet
Session Summary (1)
learning objectives
financial statements
the three key financial statements
the main elements of the balance sheet
the main elements of the profit and loss account
the main elements of the cash flow statement
Session Summary (2)
a typical horizontal balance sheet format
capital and reserves or shareholders’ equity
liabilities
the relationship between risk and return
assets
a vertical format balance sheet
valuation of assets
Learning Objectives (1)
explain the differences in accounting treatment of capital
expenditure and revenue expenditure
identify the financial information shown in the financial
statements of a company: balance sheet; profit and loss
account; cash flow statement
construct simple financial statements
outline the structure of the balance sheet of a limited
company
classify the broad balance sheet categories of shareholders
equity; liabilities; assets
Learning Objectives (2)
outline the alternative balance sheet formats
prepare a balance sheet
evaluate some of the alternative methods of asset
valuation
appreciate the limitations of the conventional balance
sheet
Capital Expenditure and
Revenue Expenditure
Revenue expenditure relates to expenditure on
those items where the full benefit of making that
expenditure is received within the current
accounting period
Capital expenditure relates to the cost of
acquiring, producing or enhancing fixed assets,
the full benefit of which is received within future
accounting periods
Financial Statements (1)
Limited companies are required to periodically prepare
three main financial statements:
balance sheet
profit and loss account
cash flow statement
Financial Statements (2)
Financial statements are required for
the shareholders
the Registrar of Companies
and are also used by, for example
analysts
potential investors
customers
suppliers
The Three Key Financial
Statements
The Main Elements of the
Balance Sheet
The Main Elements of the
Profit and Loss Account
The Main Elements of the
Cash Flow Statement
A Typical Horizontal
Balance Sheet Format
Capital and Reserves or
Shareholders’ Equity
capital
share premiums
retained earnings
Liabilities
current, or short-term, liabilities
short-term financial debt
trade creditors (or accounts payable)
accruals
long-term liabilities
long-term financial debt
long-term trade creditors (or accounts payable)
provisions
The Relationship Between Risk
and Return
Assets (1)
fixed assets
tangible fixed assets
intangible fixed assets
financial assets
current assets
Assets (2)
stocks
debtors (or accounts receivable)
cash
prepayments
A Vertical Format
Balance Sheet (1)
A Vertical Format
Balance Sheet (2)
fixed assets (FA) + current assets (CA)
– current liabilities (CL) – long-term liabilities (LTL)
=equity (E)
FA + (CA – CL) – LTL = E
Valuation of Assets (1)
valuation of items within the balance sheet is covered by
the Companies Act 1985/1989, accounting concepts and
standards
problems arise from differences in approach, and
alternative methods used to value the different categories
of assets and liabilities:
fixed assets
brand names
goodwill
research and development costs
stocks
debtors
foreign currency transactions
Valuation of Assets (2)
There are limitations to the conventional balance sheet
arising not only from the fact that it is an historical
document, but from inconsistencies in its preparation
due to
differences between companies and industries
employment of various asset valuation methods
off-balance sheet financing
window dressing
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