Watch this with a 10-15 minute audiotrack at http://vimeo.com/novusprogram/lesson13 This lesson introduces two important topics in business finance: the balance sheet and financial ratios. The balance sheet shows all of the assets, liabilities, and equity of a company at a point in time. Using the information on the balance sheet and the income statement, we can calculate several financial ratios that help us understand how a business is performing. The Novus project is a combination of video tutorials designed to be used in conjunction with a free business simulation software program. The Novus Business and IT Program contains 36 business and IT training videos, covering basic finance, accounting, marketing, economics, business strategy, Word, Excel, and PowerPoint. Users will have an opportunity to apply the lessons in the Novus Business Simulator. Over six rounds, the user or teams will have to make decisions on capital purchases, financing, production, financing, and human resources for a microbrewery. This channel has arranged the 36 video lessons into the order in which they are meant to be used with the simulator. To watch this slideshow as a video, please go to our Vimeo page at: https://vimeo.com/novusprogram. To download our free business simulation software, please go to our SourceForge page at: http://sourceforge.net/projects/novus/.

1. The Balance Sheet and Key
Financial Ratios
Training Objective: To understand the Balance Sheet and some key financial
ratios.
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2. The Balance Sheet
The Balance Sheet is a financial statement that is
created at intervals, usually every 3 months and
every year.
It is like photograph. It shows values at a given
point in time.
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3. The Balance Sheet
The balance sheet shows values in three main
segments:
– Assets What the company owns
– Liabilities What the company owes
– Equity How much the owners have
invested
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4. Assets
Assets are divided into two major categories:
Current Assets: Fixed Assets:
Cash Property, Plant and Equipment
Short-Term Investments Intangible Assets
Inventory Accumulated Depreciation
Pre-Paid Expenses Other
Accounts Receivable
Reserves Against Receivables
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5. Sample Balance Sheet
Under each main segment there are a number of accounts.
Star Hat Store Balance Sheet
Dec 31 2011 Dec 31 2010
Assets
Cash 20,000 65,000
Inventory 143,600 107,000
Accounts Receivable 30,000 0
Property, Plant & Equipment (gross) 60,000 60,000
Accumulated Depreciation -10,000 0
Net Property, Plant & Equipment 50,000 60,000
Total Assets 243,600 232,000
Liabilities
Accounts Payable 64,000 32,000
Current portion of long-term debt 5,000 0
Long-term Debt 60,000 90,000
Total Liabilities 129,000 122,000
Equity
Paid-In Capital 110,000 110,000
Retained Earnings 4,600 0
Total Equity 114,600 110,000
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6. Liabilities
Liabilities are also divided into two major categories:
Current Liabilities: Long-term Liabilities:
Accounts Payable Long-term Debt
Short-Term Debt
Current portion of long-term debt
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7. Sample Balance Sheet
Under each main segment there are a number of accounts.
Star Hat Store Balance Sheet
Dec 31 2011 Dec 31 2010
Assets
Cash 20,000 65,000
Inventory 143,600 107,000
Accounts Receivable 30,000 0
Property, Plant & Equipment (gross) 60,000 60,000
Accumulated Depreciation -10,000 0
Net Property, Plant & Equipment 50,000 60,000
Total Assets 243,600 232,000
Liabilities
Accounts Payable 64,000 32,000
Current portion of long-term debt 5,000 0
Long-term Debt 60,000 90,000
Total Liabilities 129,000 122,000
Equity
Paid-In Capital 110,000 110,000
Retained Earnings 4,600 0
Total Equity 114,600 110,000
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8. Balance
Here is the balance:
Assets = Liabilities + Equity
How the Where the money
money is comes from
being used
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9. Sample Balance Sheet
Assets = Liabilities + Equity
Star Hat Store Balance Sheet
Dec 31 2011 Dec 31 2010
Assets
Cash 20,000 65,000
Inventory 143,600 107,000 243,600 = 129,000 + 114,600
Accounts Receivable 30,000 0
Property, Plant & Equipment (gross) 60,000 60,000
Accumulated Depreciation -10,000 0
Net Property, Plant & Equipment 50,000 60,000
Total Assets 243,600 232,000
Liabilities
Accounts Payable 64,000 32,000
Current portion of long-term debt 5,000 0
Long-term Debt 60,000 90,000
Total Liabilities 129,000 122,000
Shareholders' Equity
Paid-In Capital 110,000 110,000
Retained Earnings 4,600 0
Total Shareholders Equity 114,600 110,000
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10. Safety: Debt to Equity Ratio
Star Hat Store Balance Sheet
Dec 31 2011 Dec 31 2010
Assets
Cash 20,000 65,000 Debt to Equity Ratio
Inventory 143,600 107,000
Accounts Receivable 30,000 0
129,000
Property, Plant & Equipment (gross) 60,000 60,000
Accumulated Depreciation -10,000 0
Net Property, Plant & Equipment 50,000 60,000 = 1.1x
Total Assets 243,600 232,000
Liabilities 114,600
Accounts Payable 64,000 32,000
Current portion of long-term debt 5,000 0
Long-term Debt 60,000 90,000
Total Liabilities 129,000 122,000
Shareholders' Equity
Paid-In Capital 110,000 110,000
Retained Earnings 4,600 0
Total Shareholders Equity 114,600 110,000
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11. Using Financial Statements Together
Star Hat Store Income Statement Star Hat Store Balance Sheet
Year Ending Year Ending 31-Dec-11 31-Dec-10
31-Dec-2011 31-Dec-2010 Assets
Cash 20,000 65,000
Sales 100,000 80,000 Inventory 143,600 107,000
Cost of Goods Sold - 65,000 55,000 Accounts Receivable 30,000 0
Property, Plant & Equipment (gross) 60,000 60,000
Gross Income = 35,000 25,000 Accumulated Depreciation -10,000 0
Selling General and - 15,000 15,000 Net Property, Plant & Equipment 50,000 60,000
Admin Expenses Total Assets 243,600 232,000
Liabilities
Operating Income = 20,000 10,000 Accounts Payable 64,000 32,000
Other Income and Exp - 8,000 8,000 Current portion of long-term debt 5,000 0
Long-term Debt 60,000 90,000
Pre-Tax Income = 12,000 2,000 Total Liabilities 129,000 122,000
Taxes - 2,400 400 Shareholders' Equity
Paid-In Capital 110,000 110,000
Net Income = 9,600 1,600 Retained Earnings 4,600 0
Total Shareholders Equity 114,600 110,000
9,600
Return on Equity: = 8.4%
114,600
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