FACULTY OF BUSINEE AND ECONOMICS

Department of Business Administration

Intermediate FA Group Assignment

1. A balance sheet is a statement of a business’s assets,

liabilities, and owner’s equity as of any given date. Typically, a
balance sheet is prepared at the end of set periods (e.g., every
quarter; annually).
 A balance sheet is a financial statement that contains details of a
company's assets or liabilities at a specific point in time. It is one of
the three core financial statements (income statement and cash flow
statement being the other two) used for evaluating the performance of a
business.
 A balance sheet is comprised of two columns. The
column on the left lists the assets of the company. The
column on the right lists the liabilities and the owners’
equity. The total of liabilities and the owners’ equity equals
the assets. 

2. The balance sheet can assist analysts in assessing a company’s ability to:

 The purpose of a balance sheet is to give interested parties an idea of the
company's financial position, in addition to displaying what the company
owns and owes. It is important that all investors know how to use, analyze and
read a balance sheet.
 pay for its near-term operating needs (liquidity position);
 meet future debt obligations; and
 make distributions to shareholders.

Limitations of the Balance Sheet

 Items on the balance sheet are not all measured in the same manner; some
assets and liabilities are measured at historical cost, while others are measured
 based on their current market value. The measurement method used can
significantly impact the amounts that are reported.
 Items measured at the current value reflect the value that was current at the end
of the reporting period. These values can, however, change significantly after the
balance sheet is prepared.
 The balance sheet does not incorporate important aspects of a company’s ability
to generate future cash flows such as its reputation and management
performance.

Example of a Balance Sheet

 A balance sheet depicts many accounts, categorized under assets and liabilities. Like
any other financial statement, a balance sheet will have minor variations in structure
depending on the organization. Following is a sample balance sheet, which shows all
the basic accounts classified under assets and liabilities so that both sides of the sheet
are equal.
what we mean by Liquidity and Solvency

Liquidity – the ability to meet short-term obligations, like money owed to

suppliers. Solvency – the ability to meet long-term obligations, like longer-term

debt payments. It's important when analysing a company to think about

both.

Conclusion
A balance sheet is an important reference document for investors and stakeholders for

assessing a company’s financial status. This document gives detailed information

about the assets and liabilities for a given time. Using these details one can understand

about company’s performance. By analysing balance sheet, company owners can keep

their business on a good financial footing.

3. The balance sheet items can be broadly divided into current assets,
non-current assets, current liabilities, non-current liabilities, and
shareholders’ equity. Typically, assets are placed on the left-hand side
of the balance sheet and liabilities on the left-hand side. Further, both
assets and liabilities are placed in decreasing order of liquidity with
equity placed after liabilities.
1. Current Assets
 Cash & Cash Equivalents: As it is considered to be the most liquid form of

assets, it is placed at the top left corner in the balance sheet. Cash equivalents are

clubbed with cash as it primarily includes those assets which have maturities of
 less than 3 months or can be liquidated on very short notice. Examples of cash

equivalents include marketable securities.

 Accounts Receivable: It represents the amount of sales that have been executed

on credit and has not been collected as on the balance sheet date. It is net of all

the provisions done to cover the doubtful accounts (high probability of becoming

bad debt). If entities are able to recover the receivables, then the value of

accounts receivable goes down while cash increases.

 Inventory: It represents the amount of money invested in the business in the

form of finished goods, work-in-progress goods, and raw material. When sales

are recognized then the value of this account is transferred to the income

statement in the form of cost of goods sold as per the concept of matching

principle.

 Prepaid Expenses: It consists of all those expenses that a company has already

paid but has not availed the services against the payment till the balance sheet

date. Examples of prepaid expenses include advance payment made for an

insurance policy, salary paid to workers in advance, etc.

2. Non-Current Assets
 Plant, Property, and Equipment (pp&e): It accounts for all the tangible fixed

assets on a company’s book. Examples of PP&E primarily include building,

 equipment, and land.PP&E is recorded on the net of depreciation except for land,

which is an exception.

 Intangible Assets: It accounts for all the fixed assets of a company that is

intangible in nature. These assets can be categorized into identifiable and

unidentifiable intangible assets. Patents and licenses are examples of identifiable

intangible assets, while brand value and goodwill are examples of unidentifiable

intangible assets.

3. Current Liabilities
 Accounts payable: It represents the dollar value ofthe money that a company is

obligated to paythe suppliers for goods purchased or services availed on credit.

The value of accounts payableand cash account decreases by the same amount

as the creditors are paid off.

 Unearned revenue: It accounts for the revenue for which payment has been

received but the service or product is yet to be delivered as on the balance sheet

date.

 Notes payable: It includes the creditors that are not part of the accounts payable

and are due within a year’s time. However, there are instances where notes

payable appear as part of non-current liabilities as their maturity is of more than

one year.
  Current portion of long-term debt (CPLTD): This account represents the

portion of long-term debt that has to be paid off within a year’s time. Basically,

the principle repayment due next year is captured under this head. It can be

derived from the debt amortization schedule. In some case, this account is

represented separately and are include as part of the long-term debt under non-

current liabilities.

4. Non-Current Liabilities
 Bonds Payable: It represents the value of the bonds, which the company has

issued, remaining outstanding as on the balance sheet. The bonds can be either

coupon paying or zero-coupon.

 Long-Term Debt: In CPLTD is captured under current liabilities, then it

represents the remaining portion of the long-term debt. Otherwise, it is the

aggregate of all long-term debts, which primarily include term loans.

5. Shareholders’ Equity
 Share Capital: It represents the amount of money invested by the shareholders

in the company. The share capital is categorized into – authorized and paid-up

share capital. Authorized share capital indicates the maximum number of shares

that a company is allowed to issue, while paid-up share capital represents the

actual number of shares that has been issues to the shareholders. Usually paid-up
 share capital remains stable over the period of time until there are subsequent

rounds of equity infusion to fund business requirements.

 Retained Earnings: It represents the portion of the net income that is retained in

the books of the company over a period of time. If the company makes a profit,

then after dividend payment the remaining portion of the net income is added to

this account. However, in the case of losses, it results in deterioration of the

retaining earnings.

Conclusion
So, it is important that as an analyst or an investor you know what each of the line items

of a balance sheet denotes. The importance emanates from the fact that all the items in

the balance sheet are interlinked with that of the income statement and cash flow

statement. In order to interpret the various accounting adjustments in financial

reporting one should be thorough with the line items in each of the financial

statements.

4. Purpose of statement of cash flows

The primary purpose of the statement is to provide relevant information about the
agency's cash receipts and cash payments during a period. The statement of cash
flows provides information about a company's operating, financing, and investing
activities.
So, he income statement, balance sheet, and statement of cash flows are required
financial statements. These three statements are informative tools that traders can
use to analyze a company's financial strength and provide a quick picture of a
company's financial health and underlying value.
5. Better cash-flow management begins with measuring business cash flow by
looking at three major sources of cash: operations, investing and financing.
These three sources correspond to major sections in a company's cash-flow
statement as described by a Securities and Exchange Commission guide to
financial statements.
Generally, The statement of cash flows is divided into three groups, each
examining a different source of and use for cash: cash from operating
activities, cash from investing activities and cash from financing activities.
6. Financial Liquidity
Liquidity is a company's ability to convert assets to cash or acquire cash—
through a loan or money in the bank—to pay its short-term obligations or
liabilities.
Liquidity Example (Balance Sheet)
 Cash.
 Marketable securities (These would include publicly traded stocks, bonds,
and other investments)
 Inventories (Products, finished goods, raw materials, etc. that can be
sold)
 Accounts receivable (Cash owed from sales to customers on credit)
7. Examples of Noncash Transactions
 Acquiring property, plant or equipment by assuming directly related liabilities,
such as a mortgage or loan.
 The net unrealized increase or decrease in fair market value of investments.
 Obtaining an asset by entering into a capital lease.
These non-cash activities may include depreciation and amortization, as well
as obsolescence. Property, plant and equipment resides on the balance sheet.
These items are taken on the income statement in small increments called
depreciation or amortization.
8.