Balance sheet

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The balance sheet
Aqhuman financial training & coaching

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The balance sheet
Assets
Non-current (“fixed”) assets
Property, plant and equipment
Current assets
Cash at bank
Receivables (“debtors”)
Inventories (“stocks”)

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The balance sheet
Assets
Current assets
Cash at bank
Non-current
assets we do
not intend to
liquidate

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The balance sheet
Assets
Current assets
Cash at bank
Current assets we
do intend to
liquidate (collect
debtors, sell stock
...)

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The balance sheet
Assets
Current assets
Cash at bank
What about People?

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What do we mean by an asset?
•Items where the benefit has yet to come
(equipment will produce goods in the future,
debtors will provide cash in the future)
•Are only assets to the extent that they represent a
benefit
•Are owned by the company (except for “finance
leases”; these are leases which are loans in
disguise)

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Non-current (or fixed) assets
These assets are held for some time in the
business and need to be depreciated

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Depreciation
You buy some equipment, today, for £10,000. You estimate
that it has a 5 year life, when you will scrap it.
Balance 10
sheet
Income
statement
Cash flow (10)
Today
Today; all of the benefit of
owning the equipment lies
in the future. So the
expenditure is entirely an
asset

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Depreciation
Balance 10 10
Sheet (2)
8
Income
Statement (2)
Cash flow (10)
Today
A year later 1/5th of the
expected benefit has been
used; so 1/5th of the spend
is now a cost. This is
depreciation
1 2

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Depreciation
Balance 10 10
Sheet (2)
8
Income
Statement (2)
Cash flow (10)
Today 1 2
10 10 10 10
(4) (6) (8) (10)
6 4 2 -
(2) (2) (2) (2)

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•These are sums due from our customers.
•Recall that assets are only assets to the extent that they
represent a future benefit
• So for debtors the future benefit is not how much we are
owed...
•But how much we expect to receive. So the debtor figure is
the outstanding invoice sum less any bad or doubtful debts

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•Again with inventories we can only show the future benefit
•With stocks this is the possibility of selling them at a profit
•However we cannot account for a profit until we have made
it...
•So stocks are shown at original purchase price, unless...
•There is no future benefit (ie profit). We are going to make
a loss on the stock. No benefit = no asset
•Where we are going to make a loss we reduce the holding
value of the stock to its likely net sales value

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What about people?
Are people an asset?
People are clearly an asset to a business...
But are they an asset for accounting purposes?

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People
There is only one industry where people are shown as
accounting assets....

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People
There is only one industry where people are shown as accounting
assets....
Professional sports players. Why?
Assets need to be capable of being valued. Professional sport is
the only sector where people are bought and sold.
Thus the purchasing company has an amount.
Note that if the sportsman was acquired
free then he/she does not appear on the
balance sheet (no amount)

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Intangible assets
This issue with people (only purchased people can be shown
as assets) also applies to intangible assets generally. Only
purchased intangible assets may be shown on the balance
sheet.
The most common intangible asset we encounter is
GOODWILL

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Goodwill
What makes up a company’s goodwill?

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Goodwill
What makes up a company’s goodwill?
staff
Geographic spread
Client quality
brand
Spread of products
ability
contacts
loyalty quality

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Goodwill
But remember only purchased goodwill (like
sportsmen) is shown on the balance sheet
The company’s own inherent
goodwill IS NOT shown; only that of
companies’ it has purchased

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Goodwill and amortisation
Goodwill is not amortised (depreciated)
Instead an impairment test is done a year later. The company
revalues its acquisition. If it would pay less than the original
purchase price then the goodwill is written down
An example...

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Goodwill example
Company A has net assets worth £80m.
Company B buys the company in 2011 for £110m.
£80m
£80m
£30m = goodwill

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Goodwill example
Company A has net assets worth £80m.
Company B buys the company in 2011 for £110m.
A year later it values the company at £100m. So the goodwill
is reduced by £10m to £20m.
£80m
£80m
£30m = goodwill = £20m

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Goodwill and the impairment review
Note that in the last example the £10m write
down is NOT amortisation (like depreciation,
the transfer of an asset to cost due to its
benefit being used up). Instead an
impairment write down is the
acknowledgment that company B overpaid
for its acquisition.

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Liabilities
Liabilities:
Payables due in less than a year
Trade payables (Creditors)
Short term debt
Payables due after more than a year
Long term debt
Shareholders’ Equity
Share capital
Retained earnings
There is not much
to say about the
liabilities. We shall
discuss debt and
equity when we
consider gearing in
the KPI
presentation

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The balance sheet
Liabilities:
Payables due in less than a year
Trade payables (Creditors)
Short term debt
Payables due after more than a
year
Long term debt
Shareholders’ Equity
Share capital
Retained earnings
Assets
Non-current (“fixed”)
assets
Property, plant and
equipment
Current assets
Cash at bank
The total of these 2
columns will be equal.
Assets= liabilities

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The balance sheet; an example
We buy a property for £10m, paying £2m cash, borrowing
£5m and issuing £3m of shares
Assets
Property +£10m
Cash -£2m
Net effect +£8m
Liabilities
Debt +£5m
Equity (share
capital) +£3m
+£8m
The balance sheet has increased
by £8m on both sides: it balances

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Balance sheet formats
The asset = liability format shown so far is very popular
around the world. But not in the UK!
The balance sheet assets = liabilities:
Property, plant and equipment Payables
Receivables Debt
Inventories Equity
Cash

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Balance sheet format: UK
In the UK the payables and debt are deducted from the
assets:
Property, plant and equipment Payables
Receivables Debt
Inventories Equity
Cash
(Payables)
(Debt)
Net Assets Equity

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Balance sheet example
Take the earlier example using UK format:
We buy a property for £10m, paying £2m cash, borrowing £5m and
issuing £3m of shares
Assets Liabilities
Property +£10m
Cash -£2m Equity +£3m
(Debt) -£5m
Net effect +£3m +£3m
It still balances!

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Balance sheet summary
•Assets represent future benefit and only to the extent that
they represent a benefit
•Non-current (“fixed”) assets are not intended to be
liquidated when acquired (although one can one’s mind
later)
•Goodwill is only shown where it is purchased
•There are a number of different balance sheet formats:
assets= liabilities, net assets= equity

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Aqhuman Financial Training
Aqhuman’s principal is Kevin Amor, FCA. Kevin qualified as a
chartered accountant with PWC. He spent 12 years working
in commerce at financial controller/director level.
Kevin now has more than 12 years experience in financial
training. He trains managers at all levels and gives 1 to 1
financial coaching to senior executives.
He also teaches corporate finance and
accounting for a number of business
schools’ MBA programmes.

Balance sheet

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