Chapter 15 – Building Balance Sheets

Overview

The previous chapter looked at the profit and loss account. This chapter reviews the balance sheet: a snapshot of what a business owns and owes, and it’s net worth. Balance sheets are actually remarkably straightforward. They reveal a great deal of information about a company’s financial status, but they are little more than a rearrangement of the categories of spending and revenue which we have already met. Indeed, since they are so simple, this chapter takes the opportunity to slip in a handful of new beanie buzz words. You should enjoy them.

Mastering

After reading this chapter, you should be able to answer the following questions:

• Why is the balance sheet important? Does it show financial flows or a snapshot of financial balances at a point in time? Could it be easily manipulated?
• Assets less liabilities equals what? Who owns the shareholders’ equity? What is net worth?
• Why distinguish between short- and long-term assets? Is working capital measured by current assets less current liabilities? Why is working capital important?
• How are fixed assets shown in a balance sheet? How is depreciation shown?
• Could a company use a short-term loan to buy long-lived assets? Should it?
• Why is some taxation deferred? Could this be an asset?
• What is a provision? What is a contingent liability? Why should the balance sheet show provisions for probable obligations? Why should contingent liabilities be reported in the footnotes?
• What is contributed capital? What is treasury stock? What are retained earnings?
• Where are other unrealized gains and losses reported? What is comprehensive income?
• How would you use the figures from the previous few chapters to create a balance sheet?