Analysing Balance Sheets
Learning Objective – To interpret and analyse the
contents of a business’s balance sheet
Learning Outcomes
• To be able to identify the components of a
balance sheet (E)
• To be able to interpret and analyse the data in a
business’s balance sheet (C)
• To be able to evaluate the importance of a
balance sheet to a business (A)
Questions
• What is a balance sheet?
• Who would use a balance sheet?
• Why is it called a balance sheet?
Key Terms
In pairs find out definitions for the following key
terms for this topic.
• Current assets
• Assets
• Non-current assets
• Liabilities
(or fixed assets)
• Capital
• Current Liabilities
• Creditors
• Tangible Assets
• Inventories
• Intangible assets
• Liquidity
• Non current Liabilities
• Working Capital
• Equity
Balance sheet relationships
• ASSETS = LIABILITIES
• TOTAL ASSETS = Current Assets + Non-current assets
• LIABILITIES = Share Capital + Borrowings + Reserves
Format of a balance sheet
Reading the balance sheet
• Short term – shows us ability to meet
liabilities over the next year with the level of
working capital.
• Long term – Changes in non-current assets,
how business is financed and level of reserves.
Business Time
• Lets have a look at a real balance sheet and
analyse what we can see!!
Working Capital
• What is it?
• Why is it important?
• How is it calculated?
• Where can we find it?
Question: Can you have too much
working capital?
• In short, YES!!
• Liquid assets do not really work for the business
as they are not making a return for the business.
A business needs to hold the right amount and
this depend upon:
–
–
–
–
–
Sales volume
Trade credit offered
Growing??
Operating cycle
Rate of inflation
Causes of working capital problems
• There are four main causes of working capital
problems.
• Write a small paragraph explaining how:
1. External Changes 2. Poor Credit Control
3. Internal Problems 4. Financial
mismanagement; can cause a problem with
working capital.
Importance of working capital
• Is it important to all businesses?
• What is the particular importance with
manufacturing businesses?
• Complete the table with how working capital
can be improved.
Activity time
• In the booklet provided complete the balance
sheet section
Depreciation
• What is it?
• Why do it?
• Where do we record it?
Income Statements/Profit and Loss
Accounts
• An account that shows the income and
expenditure for a business.
• Using this data it allows us to work out both
the gross and net profit for the business.
• Profit and loss account – a statement of the
revenue into a business and expenditure out
of a business over a period of time in the past.
Questions
• Why should a business create a profit and loss
account?
• Who would be interested in using the
information contained in the P&L account?
Key Terms
•
•
•
•
•
•
•
Revenue
Turnover
Gross Profit
Cost of Sales
Expenditure
Operating Profit
Net Profit
• Trading Account
• P&L Account
• Appropriation
Account
• Overheads
• Dividends
• Retained Profits
IS/P&L Layout
Analysing P&L
• Should never be looked at in isolation.
• Is good for looking at how managers have handled
costs or how well business has done in terms of
revenue.
• Good for analysing trends along with previous data,
especially when looking at gross and net profit.
• Have to be aware of window dressing.
Real Business!!
• Have a look at the Income Statements/ P&L
accounts of the 5 businesses provided.
Profit Quality
• High Quality Vs Low Quality
Extraordinary and Exceptional Items
• What are they?
• How can they impact the IS/P&L?
• Evaluate the impact these have on profit
quality?
P&L activity
• Complete the P&L section in the booklet
provided.
Homework
• Please complete homework 2 in the pack
using the Invicta Case Study for next week.