Module 3 The Balance Sheet Omar ElKheshen – kheshen@gmail.com 1 Learning Objectives By the end of this module you should understand: 1. The detailed structure of the balance sheet and the valuation problems surrounding fixed assets, inventories and debtors 2. The relationship between asset valuation and the measurement of profit 3. The impact of gearing on profits available for distribution to shareholders 4. Why a balance sheet must always balance 5. The significance, and construction, of the statement of cash flows Omar ElKheshen – kheshen@gmail.com 2 Agenda 3.1 Introduction 3.2 The Anatomy of the Balance Sheet 3.3 Fixed Assets 3.4 Current Assets 3.5 Current Liabilities 3.6 Net Current Assets and Net Assets 3.7 Why Does a Balance Sheet always Balance? Review Questions Case Studies Omar ElKheshen – kheshen@gmail.com 3 In module 2 we’ve seen that the measurement of a company’s profit (or loss) depends to a very large extent on the valuation of certain assets Valuation of assets like: Inventories Have a significant impact on profits Depreciable Fixed Assets We’ve also seen that there are 2 categories of assets with varying values: Assets Untransformed Means of Production Transformed means of production
Land
Buildings
Plant and machinery
Raw materials
Work-in-progress
Finished goods, which have not yet been released into the P/L account Omar ElKheshen – kheshen@gmail.com 4 The following example shows how assets affect the profit and loss account Problem A new business purchases light fittings for its offices and warehouse for €1,000. During the first year it pays €100 to the local power utility company for energy consumed by these fittings. What are the accounting treatments for these transactions? Solution €100 energy consumption Expense in the P/L Account It has no future benefit €1,000 Light Fittings Fixed Asset in the Balance Sheet It provides future benefit to the business Annual Depreciation Cost Expense in the P/L Accou