6. Explaining the Balance Sheet

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Из курса от партнера IESE Business School

Accounting: Principles of Financial Accounting

659 оценки

IESE Business School

Accounting: Principles of Financial Accounting

659 оценки

Курс 1 из 5 — Specialization Foundations of Management

Financial Accounting is often called the language of business; it is the language that managers use to communicate the firm's financial and economic information to external parties such as shareholders and creditors. Nobody working in business can afford financial illiteracy. Whether you run your own business, work as a manager or are just starting your career, you want to understand financial information and be able to interact with accountants, controllers, and financial managers. You want to talk business! This course will provide you with the accounting language's essentials. Upon completion, you should be able to read and interpret financial statements for business diagnosis and decision-making. More importantly, you will possess the conceptual base to keep learning more sophisticated accounting and finance on your own. Do not forget that, as with any other language, becoming proficient with accounting requires constant practice.

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Course Overview & Week 1: Introduction to Accounting - The Balance Sheet

Welcome! Before you start today's videos, please have a look at the syllabus. In this first session, I'll give you an overview of what accounting is all about and why it's important to have a basic proficiency in this "language." In addition, I'll introduce one of the most important financial reports - the balance sheet - and a practical real-world case so you can put theory into practice. Objectives: To gain insight into the essence of accounting and become familiar with the balance sheet and its purpose.

1. Accounting: The Language of Business6:17

2. Practice Case: The Campus Bookstore I7:07

3. Practice Case: The Campus Bookstore II3:09

4. Accounting for our First Transactions3:10

5. Accounting for More Transactions5:07

6. Explaining the Balance Sheet7:05

7. Defining an Asset6:04

8. Defining a Liability4:26

Познакомьтесь с преподавателями

Marc Badia
Assistant Professor
Accounting and Control

[MUSIC]

The document we have been preparing so far is called The Balance Sheet.

This is the first and most important financial statement.

Actually, every single transaction is reflected here.

At the end of the day we are talking about the same pie sliced from two

points of view.

On the right-hand side we are saying, where is the money coming from?

Shareholders, equity, and liabilities.

On the left-hand side we are saying, where is the money now?

The uses of capital.

Those are the assets.

So by construction, both have to be the same.

So let's go into more detail.

On the asset side we can distinguish here current assets and noncurrent assets.

Current assets are those assets that are either cash or

they're going to turn into cash in the near term.

For example, inventory.

We expect to sell it and collect the cash.

The prepaid rent is going to be consumed in the next few months, as well.

Noncurrent assets are long-term resources that are here to stay.

Furniture and equipment, if we had land or buildings.

These are the things that we're not planning to sell,

they are going to be here for the long run and, therefore,

they are not going to turn into cash.

If we go to the shareholder's equity and liabilities, first for the liabilities,

we can distinguish between current liabilities and noncurrent liabilities.

When we talk about liabilities we mean about sources of capital that we need to

return, so they have a maturity date.

Whereas shareholder's equities, the capital contributed by shareholders, and

obviously we don't need to return it.

Let's go back to liabilities.

In liabilities I said current liabilities, so those are due within a year so

you need to repay these debts with a year.

For example, in this case we have the suppliers, the accounts payable,

that we need to repay in the next few months.

Noncurrent liabilities would be those that you need to repay in the long run,

in more than a year.

In this case, for example,

the bank loan, I think that we have to repay it in three years, Christina said.

So we don't need to worry for the next three years.

Note that the balance sheet is a picture at a point in time.

So every single transaction that takes place in a business is going

to be reflected on the balance sheet.

Everything is there.

This is why we say this is the first and most important financial statement.

The balance sheet is also called the statement of financial position

because precisely it tells you how you are financing all the assets,

all the investments that you have, so with which sources of capital.

Finally, let's take a look at how the accounts are classified,

our order in the balance sheet.

On the assets side, you see that the order is from more liquidity to less liquidity,

cash being the most liquid asset.

On the right-hand side we ordered the accounts according to the maturity date.

So, first, we have liabilities with shorter maturity.

And at the end, you're going to have the accounts with actually no maturity.

For example, shareholders equity, that's money that you don't need to return, so

it has no maturity.

Now, the order could be the opposite, as well.

So actually what we find is that the system we have been following before

is the typical system for Anglo-Saxon countries.

But, for example, in continental Europe, the order is the opposite.

At the end of the day, it doesn't matter.

It's just a matter of how you present your balance sheet.

What is clear is that the numbers are going to be the same,

that you have the balance of every single account there.

And at the end, the total amount of assets

is going to be the same as the total amount of owner's equity and liabilities.

This is the basic accounting identity.

After this first explanation about what the balance sheet, let's go now and

talk with Christina to show the balance sheet we have prepared.

Hello, Christina, I scheduled you a meeting already.

>> Hey, Marc, yeah, I just had a few errands I needed to run.

>> Okay, but just in time, I bring you good news.

I already have the summary report with the balance

sheet as of December 31st with all the transactions.

>> Great, fantastic, have a look.

All right, I think I'm going to need some help understanding this.

>> Well, no worries, I think that we can do that.

The balance sheet is also called the statement of financial position.

What we see on the campus bookstore balance sheet

is that the noncurrent assets, the long-term resources we have here,

are actually financed by long-term sources of capital,

meaning the capital contributed by the shareholders, the share capital,

plus the bank loan, which is a long-term bank loan, a long term liability.

This is very important because no current assets are going to turn into cash

in the near term, and so it's important that we don't have to repay

the debt with which we are financing these long-term assets.

Here in the balance sheet of the campus book store,

we see that no current assets are financed with long-term sources of capital.

So we have long-term sources of capital of 70,000, so

the 50,000 from the share capital, from the shareholders,

plus the 20,000 of the bank loan that we can return in three years.

And this is more than enough to finance the long-term investments of 28,000.

This is important because known current assets are not cash, they are not going to

turn cash in the near term, and they are going to be here for the long run.

Another way to put this is that if we look at current assets,

they are enough to cover the current liabilities.

Remember, current assets are cash, and

other accounts that would turn into cash in the near term.

And as we see here, this is 92,000 euros.

This cash that we're going to generate in the short run

is more than enough to return the current liabilities, which are 50,000.

The difference between current assets minus

current liabilities is often called working capital.

And this is the concept that you're going to build with,

especially in operating finance.

So, apparently, in this company, there is a good financing equilibrium.

Known current assets are financed with long-term resources,

with long-term sources of capital.

And current assets are enough to cover the current liabilities.

Regarding inventories, we don't know whether they are high or

low, we have not studied selling yet.

So we'll see later in the year, whether they are being sold at a good pace or not.

We also don't know at what price we're going to sell them.

I should write what we see here on the balance sheet is the purchase

cost of these inventories.

Something else that we see in the balance sheet is that the company doesn't own

buildings and lands.

Why? Because actually they

are renting the premises, so you see here the prepaid rent.

If the company had invested in lands and buildings,

for example, obviously they would have needed many sources of capital.

In the next couple of videos, I'm going to define more precisely assets &

liabilities, and I'm going to give you a few examples.

[MUSIC]

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