37. Structure of a company’s balance sheet. Analysis of assets and liabilities structure
In financial accounting, a balance sheet or statement of financial position is a summary of a person's or organization's assets, liabilities and ownership equity on a specific date, such as the end of its financial year. A balance sheet is often described as a snapshot of a company's financial condition. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time.
A company balance sheet has three parts: assets, liabilities and shareholders' equity. The main categories of assets are usually listed first and are followed by the liabilities. The difference between the assets and the liabilities is known as the net assets or the net worth of the company.
Records of the values of each account or line in the balance sheet are usually maintained using a system of accounting known as the double-entry bookkeeping system.
Assets and liabilities are listed in order of liquidity. Usually, cash comes first, followed by current assets -- accounts and notes receivable -- and fixed assets such as land, building and equipment. On the right-hand side, current liabilities -- accounts and notes payable -- are listed first, followed by long-term liabilities such mortgage payable. The owners' equity, which consists of the initial investment, common stock and retained earnings, follows the liabilities' section.
Types of balance sheets:
Classified Balance Sheet
A classified balance sheet presents accounts in distinct groupings or categories. For example, the sheet can classify assets as current, long-term investments, property, plant and equipment, and intangible assets. Liabilities can be classified as current liabilities and long-term debt. The owners' equity section includes invested capital, beginning and current retained earnings. Readers typically find this format very useful.
Common-Size Balance Sheet
A common-size balance sheet restates each dollar amount on the balance sheet as a percentage of a common base figure. It divides each asset by the total asset amount, each liability by the total liability amount, and each item in owners' equity by the total owners' equity amount. The final totals of each section equal 100 percent. When analyzing this balance sheet, company executives can quickly compare their percentages to the industry's average percentages. For example, a company with inventory at 8 percent of total assets can check if this percentage compares favorably with industry statistics. Outsiders -- banks, potential investors, creditors -- can compare two companies within the same industry without knowing actual dollar amounts.
Projected Balance Sheet
Preparing a projected balance sheet presents challenges, with an inaccurate result. Instead, the projected balance sheet provides a detailed plan of the company's future regarding allocation of resources, financing and operations.
Structure
Guidelines for corporate balance sheets are given by the International Accounting Standards Committee and numerous country-specific organizations.
Assets
Current assets
1. inventories
2. accounts receivable
3. cash and cash equivalents
Long-term assets
1. property, plant and equipment
2. investment property, such as real estate held for investment purposes
3. intangible assets
4. financial assets (excluding investments accounted for using the equity method, accounts receivables, and cash and cash equivalents)
6. biological assets, which are living plants or animals. Bearer biological assets are plants or animals which bear agricultural produce for harvest, such as apple trees grown to produce apples and sheep raised to produce wool.[17]
Liabilities
1. accounts payable
2. provisions for warranties or court decisions
3. financial liabilities (excluding provisions and accounts payable), such as promissory notes and corporate bonds
4. liabilities and assets for current tax
5. deferred tax liabilities and deferred tax assets
6. minority interest in equity
7. issued capital and reserves attributable to equity holders of the parent company
Equity
The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders' equity.
1. numbers of shares authorised, issued and fully paid, and issued but not fully paid
2. par value of shares
3. reconciliation of shares outstanding at the beginning and the end of the period
4. description of rights, preferences, and restrictions of shares
5. treasury shares, including shares held by subsidiaries and associates
6. shares reserved for issuance under options and contracts
7. a description of the nature and purpose of each reserve within owners' equity
38. Financial planning process. Budgeting.
Corporate financial planning (FP) might be defined in the following manner - it is a process, in which a firm:
Formulates a set of consistent business and financial objectives;
Identifies where management would like to have the firm in the future;
Projects the financial impact of alternative operating strategies with respect to different financial policies (capital structure policy, dividend policy, etc);
Evaluates these impacts and decides which financial policies to adopt and what sort of long-term and short-term financing program to pursue; and
Prepares contingency plans in addition to basic financial strategies in case future events differ from those now expected.
FP involves analyzing the interactions among the capital investment, capital structure, dividend, liquidity, financing, and liability management options available to the firm.
The emphasis in FP is on analysis rather than on strict optimization. It indicates the expected consequences of alternative courses of action. FP helps a firm evaluate anticipated returns and risks and determine a reasonable set of strategies, which are embodied in its financial plan.
FP typically consists of two phases. First, the firm prepares a long-term financial plan. Most companies have a long-term planning period of between 3 and 5 years. Second, the firm also prepares a more detailed short-term financial plan, which contains a cash budget for the coming year, based on the first year of the long-term plan. Most companies update their financial plan annually.
The principal components of an effective corporate financial plan include:
A clear statement of the corporation’s strategic, operating and financial objectives;
A clear statement of the business and economic assumptions, on which the plan is based;
A description of basic business strategies that will be applied;
An outline of the planned capital expenditure programs, including break-downs by periods (e.g. by year), by divisions and product lines, and by category (e.g. for plan expansion, for acquisitions, for replacement of existing equipment, etc);
An outline of the planned financing programs, including break-downs by time period, by source of funds (i.e. external versus internal), and by class of security (i.e. preferred stock, common stock, long-term debt, etc);
A set of pro-forma statements, including period-by-period income statements (IS), balance sheets (BS), and statements of cash flows (SCF). The ISs will illustrate the projected operating results. BSs and SOFs will illustrate the projected changes in financial condition.
FP to a large extent involves forecasting. Forecasting concentrates on the expected outcome. The real value of FP is that it helps the firm to prepare for deviations from the expected outcome. Forecasts related to FP: sales forecasts, forecasts of fixed and variable costs.
Budgeting is an integral part of a company’s financial management and planning. Budget represents a specific quantitative goal that is set as an objective for a company or department, reflecting a management plan for business growth and development. Budget is a plan expressed in money. It is prepared and approved prior to the budget period and may show income, expenditure, and the capital to be employed.
Budget period is the time frame, for which the budgets are being compiled, and during which they are being adjusted. All types of budgets that are created within a company should have a unified budget period. Most commonly, budgets are being planned for one year and then are being adjusted on a semi-annual or quarter basis.
There exist several types of budgets: physical budgets (unit sales, personnel, unit production, unit inventories, physical facilities), cost budgets (production costs, selling costs, administrative costs, financing costs, R&D costs), cash budget (cash revenues, cash payments, financing needs), and profit budget (sales revenues, COS, other expenses). All these budgets form the consolidated (master) budget of a company.
Budgets perform three basic functions for the company. First, they indicate the amount and timing of the firm’s needs for future financing. Second, they provide the basis for taking corrective action in case when budgeted figures do not match actual or realized figures. Third, budgets provide benchmarks that can be used to evaluate the performance of people responsible for carrying out those plans and, in turn, controlling their actions.
Budgets should be focused not only on figures, but also on actions and company’s strategies. Budgets are composed with the help of special modes (consumption model, price model) and of course to a large extend rely on the firm’s forecasts. Nowadays budgets are created with the help of special software packages.