Balance Sheet
General purpose report that provides an outline of a businesses assets and liabilities. Providing a snapshot of the businesses financial position at a point in time.
Assets
Assets are present economic resources controlled by a business as a result of past transactions or events, which are expected to provide future economic benefits.
Key marker words: present, controlled, past, future
Liabilities
Liabilities are present obligations of a business arising from past transactions or events, which are expected to result in a future outflow of economic benefits.
Key marker words: present, past, outflow
Equity
Owner’s equity is the residual interest in the assets of a business after deducting liabilities.
Key marker words: residual, liabilities
Working Capital
Measures in monetary terms, the amount of excess C.A. the firm has after covering C.L.
Strategies to improve liquidity
Sell off cash (only improves Q.A.R.)
Control Expenses (reducing costs may harm business operations)
Renegotiating repayments w/ creditors or bank (reducing costs may harm business operations)
W.C.R.
Measures a businesses ability to pay short-term debts within 12 months and to cover emergencies that may arise
Q.A.R.
Measures firms immediate liquidity, that is, the businesses ability to pay back its debt within 90 days.
Ideal W.C.R.?
1.5-2 :1
Ideal Q.A.R.?
1.1-1.5 :1
What is W.C.?
C.A. - C.L.
What is liquidity?
A businesses ability to pay its SHORT-term debits (C.L.) using its short term assets (C.A.)
What is solvency?
A businesses ability to meet its LONG-term financial obligations as they FALL DUE.
Define Debt Ratio (%).
Measures the % of business assets funded from EXTERNAL sources.
Acceptable Debt Ratio %?
Depends on the industry it’s in, generally 50% plus is considered HIGHLY GEARED
The higher the % = HIGHLY GEARED (…may cause financial risk)
Define Debt/Equity Ratio (%)
Measures the proportion of the business’ finance that is sourced EXternally COMPARED to INternally
less than 100% = more financed by internal sources
lowly geared = creditors have low level risk → lenders more likely to borrow.
Define TIE (times)
measures the number of times the interest expense of the business can be covered by its level of profit
higher than 2 = good.
e.g.
2.65 times means “for every $1 INTEREST business PAYS, it EARNS $2.65 in PROFIT before interest and taxes… suggesting business can meet its interest obligations 2.65 times over
