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Shvoong Home>Business & Finance>Accounting>Financial Statements-Balance Sheet and Cash Flow Review

Financial Statements-Balance Sheet and Cash Flow

Article Review   by:SnehLata     Original Author: MYSELF
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Most people go to a doctor once a year to get a checkup—a snap-
shot of their physical well-being at a particular time. Similarly,
companies prepare balance sheets as a means of summarizing their
financial positions at a given point in time.
Assets = liabilities + owners’ equity
Assets are the things a company invests in so that it can conduct
business—examples include financial instruments, land, build-
ings, and equipment. In order to acquire necessary assets, a com-
pany often borrows money from others or makes promises to pay
others. That money, which is owed to creditors, is called liabilities.
Owners’ equity, also known as shareholders’ equity, includes the
capital that investors have provided and the profits retained by the
company over time. If a company has Rs. 3 million in assets and Rs. 2
million in liabilities, it would have owners’ equity of Rs. 1 million.
Assets = Liabilities + Owners’ equity
Rs. 30,00,000 = Rs. 20,00,000 + Rs. 10,00,000
By contrast, a company with Rs. 3 million in assets and Rs. 4 million
in liabilities would have negative equity of Rs. 1 million—and seri-
ous problems as well.
Thus, the balance sheet provides a description of how much,
and where, the company has invested (its assets)—broken down
into how much of this money comes from creditors (liabilities)
and how much comes from stockholders (equity). Moreover, the
balance sheet gives you an idea of how efficiently your company is
utilizing its assets and how well it is managing its liabilities.
Balance sheet data is most helpful when it’s compared with in-
formation from a previous year. In the table “Amalgamated Hat
Rack balance sheet as of December 31, 2008,” a comparison of the
figures for 2008 against those for 2007 shows that Amalgamated
has increased its total liabilities by Rs. 38,000 and increased its total
assets by Rs. 38,000, thus resulting in no change in owners’ equity.
(Explanations for key terms follow.)
The balance sheet begins by listing the assets that are most eas-
ily converted to cash: cash on hand, receivables, and inventory.
These are called current assets.
Next, the balance sheet tallies other assets that have value but
are tougher to convert to cash—for example, buildings and equip-
ment. These are called fixed or long-term assets.
Since most long-term assets, except land, depreciate over time,
the company must also include accumulated depreciation in this
part of the calculation. Gross property, plant, and equipment
minus accumulated depreciation equals the current book value of
property, plant, and equipment.
Tip: The balance sheet distinguishes between short-
term liabilities, also known as current liabilities, and long-
term liabilities. Short-term liabilities typically have to be
paid in a year or less; they include short-term notes,
salaries, income taxes, and accounts payable. 
Subtracting current liabilities from current assets gives you the
company’s working capital. Working capital gives you an idea of
how much money the company has tied up in operating activi-
ties. Just how much is adequate for the company depends on the
industry and the company’s plans. For 2008, Amalgamated had
Rs. 9,04,000 in working capital.
Most long-term liabilities are loans.
Owners’ equity comprises retained earnings (net profits that ac-
cumulate in a company after any dividends are paid) and con-
tributed capital (capital received in exchange for stock
The cash flow statement
A cash flow statement gives you a peek into a company’s checking ac-
count. Like a bank statement, it tells how much cash was on hand at
the beginning of the period, and how much was on hand at the end
of the period. It then describes how the company spent its cash.
If you’re a manager in a large corporation, changes in the com-
pany’s cash flow won’t typically have an impact on your day-to-
day functioning. But you can affect cash flow in your company.
And it’s a good idea to stay up to date with your company’s cash
flow projections, because they may come into play when you pre-
pare your budget for the upcoming year. For example, if cash is
tight, you will probably be asked to be conservative in your spend-
ing. Alternatively, if the company is flush with cash, you may have
opportunities to make new investments.
If you’re a manager in a small company, you’re probably keenly
aware of the firm’s cash flow situation and feel its impact almost
every day. The cash flow statement is useful because it shows
whether your company is turning profits into cash—and that abil-
ity is ultimately what will keep your company solvent. As the ex-
ample of Amalgamated Hat Rack continues, we see in the table
“Amalgamated Hat Rack statement of cash flows, 2008” that the
hat rack company generated cash flow of Rs. 95,500 in 2008. 
The cash flow statement doesn’t measure the same thing as the
income statement. If there is no cash transaction, it cannot be re-
flected on a cash flow statement. Notice, however, that the cash
flow statement starts with net income. Then, through a series of
adjustments based on the increases and decreases in asset and lia-
bility accounts from the balance sheet, the cash flow statement
translates this net income to cash.
In general, a company looks to three sources of cash: ongoing
operations, investment activities, and financing activities. It’s tra-
ditional to start with ongoing operations

Published: March 22, 2010   
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