Current Fixed assets
cash in hand
or in the bank
accounts
receivable (amounts due from customers)
Land
Buildings
Equipment, plant, machinery
prepaid expenses (advance
payments of insurance, rent, etc.)
inventories(materials,
supplies or goods on hand)
Vehicles
readily marketable securities
(expected to be sold within one year)
Goodwill, patents, trademark,
copyrights
Investments
b) distinguish between current and fixed assets.
2. Here are some answers about assets of a company. Write the questions.
a) What ______________?
Assets are the resources owned by a business
b) How_______________?
Liquid asset is the asset which is easily turned into cash without loss of value whilst illiquid asset is the one which is difficult to turn into cash without loss of value.
c) Why_______________?
Fixed assets are normally those which the business intends to hold for more than one year and which are not intended for resale.
d) What___________________?
Both patents and copyright attempt to protect the originators of an idea from exploitation by other people.
e) In what way______________?
Current assets are those which are used up in the day – to – day operations of a business and which can be converted into cash faster and without potential loss of value.
f) What____________________?
Current assets include stock, debtors and prepayments, cash at bank and cash in hand.
g) Which___________________?
Money lent to the business and also money invested in the business by the owners.
h) When____________________?
Current liabilities payments are to be made in the current financial year.
Discussion
Work in small groups.
Define a patent and discuss why patents, goodwill and trademarks are considered assets of a business.
Reading
Read text 9 using your dictionary to help with new words.
TEXT 9
Balance sheet
A balance sheet is the financial statement that reports the financial condition of a firm at a specific time as recorded by an accountant. It is composed of assets and liabilities.
A balance sheet provides a summary of the way in which a business has used the resources available to it over a period of time. In Table 1 you can see the balance sheet of the Baines Nursery at the start of trading.
Table 1 Balance sheet, Baines Nursery at start of trading
Balance sheet: Baines Nursery as at 30 September 2004
Freehold land/buildings £ 30000 Proprietor's capital £35000
Cash at bank £ 5000
Between 1 October and 14 November the Baines employ a builder to undertake the necessary alterations. For the purposes of this case study we will assume that the cost of the alterations was exactly the same as his estimate, £10 000. He funded the alterations by borrowing £10 000 from the bank. This gives the following action:
Assets (freehold property)+£10 000
combined with a reaction:
Assets (bank loan)-£10 000
Table 2 Balance sheet, Baines Nursery, after alterations to premises
Balance sheet: Baines Nursery as at 30 November 2004
F
reehold
land/buildings £40000 Proprietor's capital £35000
Cash at bank £ 5000 Bank loan £10000
The Baines buy fixtures and fittings together with equipment to the value of £5000. Again this is an assets +/ assets- transaction.
Table 3 Balance sheet, Baines Nursery, after purchase of fixtures, fittings and equipment and grant of bank loan
Balance sheet: Baines Nursery as at 31 December 2004
F
reehold
land/buildings £40000 Proprietor's capital £35000
Fixtures & fittings £ 5000 Bank loan £10000
Cash at bank £—
The Baines are now short of money. They negotiate an overdraft for £1000. This increases both their liabilities and their assets.
Table 4 Balance sheet, Baines Nursery, after negotiation of overdraft
Balance sheet: Baines Nursery as at 31 January 2005
F
reehold
land/buildings £40000 Proprietor's capital £35000
Fixtures & fittings £ 5000 Bank loan £10000
Cash at bank £ 1000 Overdraft £ 1000
Table 5 Balance sheet, Baines Nursery, after first six months' profit
Balance sheet: Baines Nursery as at 31 July 2005
F
reehold
land/buildings £40000 Proprietor's capital £35500
Fixtures & fittings £ 5000 Bank loan £10000
Cash at bank £ 500
After six months in operation the Baines have accumulated enough cash to pay off their overdraft with £500 to spare. Their cash figure will fall (assets-) but so will the overdraft disappear (liabilities-) and the proprietors' capital will be increased by the amount of their own money now in the bank. This is, of course, a very simple form of balance sheet but it does illustrate the principles contained in all balance sheets. On the right are the liabilities or the sources of funds used by a business. On the left the listed assets show how these funds have been used.
Table 6 Columnar form of balance sheet
Balance sheet as at.................
£000 £000 £000
ASSETS EMPLOYED
FIXED ASSETS Cost Deprec. Net
Freehold premises 4000 1000 3000
Leasehold premises 1000 370 630
Plant and machinery 5000 2355 2645
M
otor
vehicles 970 200
770
Investments
10970 3925
7045
CURRENT ASSETS
Stock (inventories) 5500
Debtors and prepayments 1500
Marketable (liquid) securities 500
Bank balance and cash 100
7600
Deduct
CURRENT LIABILITIES
Creditors 1754
Tax and prepayments in coming year 500
Bank overdraft 451
P
roposed
dividends 335
NET CURRENT ASSETS 3040
NET ASSETS EMPLOYED 4560
12400
FINANCED BY:
SHARE CAPITAL
Ordinary shares 5300
Preference shares 2100
7400
RESERVES 2500
9900
LOAN CAPITAL 2500
Debentures
12400
The way in which the balance sheet in Table 5 is presented is called the T form. It is still in use but most large businesses now use the columnar form, as shown in Table 6. This has the major advantage of distinguishing clearly between the sources and use of funds and it is generally accepted as an easier form to interpret.
The balance sheet shows the position of a business at a given moment but it does not tell us how the business reached that position, the level of its sales and how the profit made had been divided between the various parties with a claim to it. For this information we need two other financial statements: the profit and loss account and the funds flow statement.
Comprehension check.
Working in pairs, answer the questions.
a) What is a balance sheet?
b) Why is it necessary for a business to provide a balance sheet for report?
c) What is the difference between the columnar form and the T form?
d) What are two other financial statements?
Read the text again. Find and write down words in the text that mean the same as the following words and definitions. They are in the same order as they appear in the text.
|
a. a written statement showing the value of a company at a particular time |
b. something such as money, workers, or equipment that can be used to help a business |
c. an arrangement in which someone completely owns a building or a piece of land |
|
d. money in the form of notes and coins |
e. to agree to be responsible for a job or project and do it |
f. a change in the form of something |
|
g. the amount of money that is needed in order to buy, pay for, or do something |
h. a statement telling a customer how much money you will charge if they employ you to do a particular piece of work |
i. to provide the money for something that costs a lot |
|
j. to receive and use money that belongs to someone else and promise to give it back to them later |
k. money provided by a bank to a customer, for an agreed purpose and period of time |
l. the buildings that a business or organization uses |
|
m. a piece of furniture or equipment that is fixed in its place and is considered part of the building |
n. a piece of something that you connect to something |
o. the action or process of buying or selling or doing something related to business |
|
p. to buy something |
q. to be pressed for money |
r. an agreement with your bank that allows you to spend money when you have no money left in your account |
|
s. a person, place or thing that provides something you need or want |
t. assets which are expected to stay in the business for longer than the given accounting period. The business will need them to continue operations in future |
u. assets which are “used up” in the day - to – day operations of a business and which can be converted into cash faster and without potential loss of value |
|
v. property or goods that you agree to give to someone who has lent you money if you cannot pay the money back |
w. to take an amount or number from a total |
x. regular costs and money owed
|
|
y. an official arrangement with a company in which the company promises to pay a fixed rate of interest on money you have invested in it |
z. an official document that lists the amounts of money that have been put in or taken out of a bank account | |
Working in pairs, compare the net profit of Baines’ Nursery after tax with the amount of money they invested in the business. Assuming banks are paying 10 per cent interest on deposit accounts should the Baines be pleased with the results of their first year’s trading? Explain your answer.
Look at this example of a balance sheet. Replace the underlined words or phrases with a word or phrase from the box with a similar meaning.
bank overdraft land preference shares tax
capital reserves ordinary shares share capital working capital creditors plant stock
BOGUS INDUSTRIES plc
Balance sheet as at 31 December 2004
ASSETS $000
Fixed assets
(1) Property 420
Buildings 180
(2) Equipment and machinery 100
Total fixed assets 700
Current assets
Raw materials } (3) goods
Work-in-progress } held in 200
Finished goods } storage
Debtors 90
Cash in bank 60
Total current assets 350
Current liabilities
(4) People owed money 80
(5) Money owed to the bank 50
(6) Money owed to the government 35
Total current liabilities 165
(7) Net current assets 185
Net assets 885
CAPITAL
(8) Money invested in the company and represented by shares
(9) Shares paying a variable dividend to shareholders 500
(10) Shares paying a fixed dividend to shareholders 300
(11) Shares held in a special fund used to pay off
creditors if the company goes into liquidation 85
Total 885
Reading
Read text 10 using your dictionary to help with new words.
TEXT 10