After that brief introduction and motivation for the first module, let's get into it. We consider the balance sheet. Let's delve into the main items that you will find on any company's balance sheet. The balance sheet gives you a snapshot of the value of the assets and liabilities. At a particular point in time. So what the balance sheet gives you, is the financial situation taken at a particular point in time, usually the end of the financial year. So here's an example for Kellogg's. Assets $15 billion, liabilities $12 billion, equity $2.8 billion. What do these numbers mean? Well, let's consider your situation. Let's imagine that you perceive a business opportunity to deliver goods. To be able to deliver those goods, to households, you need to invest in a van. The delivery van needs to be paid for. You might have some funds available and we would label these funds equity. Your contribution to the investment in the firm. But it won't be enough. So you'll have to go to the bank and ask for a loan. The bank will provide that loan and that will be labeled as a liability on your business. So there you have it. On the left is the value of the van, the purchase price of the van. That's your asset. On the right, you will find the liabilities, the bank loan to finance that van, and the equity, the cash that you invested yourself into that van. That would be the financial position of your business operation at that point in time. Well it's exactly the same for Kellogg's. Obviously, there are a lot more items on the balance sheet for Kellogg's than there would be for your small business operations, but the principles are the same. So here's a more detailed representation of one component on that balance sheet, the assets for Kellogg's. You will find there that the assets are further distinguished between two broad groupings, current assets, and non-current assets. That distinction has got something to do with the fact of how the term of those assets influences the financial position of the firm. So assets summarise what the company owns. In your example, the van to deliver the goods. In Kellogg's example, assets would be many different items. It would be the plants. It would be the property where Kellogg's transforms its raw materials into cereals. It would be the equipment to do that transformation. Some of those assets are fixed. Some of those assets are what we would call liquid. Let's focus first on the fixed assets. We call those the non-current assets. Assets that cannot easily, quickly be transformed into cash. Among the non-current assets, we find those items I've just touched on, property, plant and equipment. That the corporation has invested into start production of materials. But there's also another pretty important component on that list, and that is labeled goodwill and other intangible assets. That could be investment in research and development. It could be a reflection of goodwill achieved from an investment in another corporation, a takeover of another corporation. And the valuation that Kellogg's attaches to the quality of the management, the quality of the people working for that company being well in excess of the purchase price of that entity. So, just a quick recap of how the assets are actually valued, transformed into numbers on the balance sheet. First, we note the value as book value. And book value is defined as the acquisition cost of the asset. And from that, we subtract the accumulated depreciation expense. Accountants assume that all assets invested in will eventually deteriorate in value, and they will therefore imply a depreciation schedule where by the book value of the assets is progressively diminishing over time. Special note on the goodwill component and the intangibles that you will also find on the non-current assets, which are recorded at the investment purchase price for those assets, and we subtract from that the actual book value of the investment at the time of investing. The difference between those indicates that there is some friction between market value, what the company was prepared to pay for the takeover target, and what the actual book value was. What the balance sheet of that particular corporation was at the time of investment. Again, like the other non-current assets property plants and equipment, goodwill will also be amortised over time. It is assumed to run out over time and diminish in value over time. So just recapping, property, plants and equipment could be reflected in Kellogg's example by the fact that Kellogg's might own land, farmland. It might own the machinery operating in harvesting the grains. But it's also the processing machinery in the plants that Kellogg’s operates where it transforms the grains into cereals. Moving on to the other assets, the other major component on the asset side of the balance sheet, that would be the current assets. Assets that can quickly be converted into cash or cash itself. So it includes things like the inventories that Kellogg's holds. It includes things like accounts receivable. Not all customers pay in advance or pay on the delivery of the goods. Very frequently, corporations are providing customers with a credit period. The goods have been sold but the amounts of those haven't been received yet, but will be received fairly soon. Those would be accounts receivable, I've already mentioned cash. These are the assets that the company owns that can quickly be converted into cash, including cash. So it includes the inventories that's captured in the warehouse. It includes shipments, goods that have been sold but have not yet been paid for.
