10. Preparing the Balance Sheet

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En provenance du cours de IESE Business School

Accounting: Principles of Financial Accounting

673 notes

IESE Business School

Accounting: Principles of Financial Accounting

673 notes

Cours 1 sur 5 dans 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.

À partir de la leçon

Week 3: The Cash Flow Statement

Now that you have a good grasp of the balance sheet and income statement, I'll help you master how to recognize the transactions we went over in week two. I'll also introduce a third financial report - the cash flow statement - and discuss liquidity. Course objectives: To understand the difference between liquidity and profitability, become familiar with T-accounts and gain insight into the purpose of the cash flow report.

1. Introduction to Week 32:10

2. Recap of Week 23:15

3. T-Accounts and Journal Entries5:45

4. Setting up T-Accounts for the Campus Bookstore3:06

5. Sales, Cost of Goods Sold, Collections from Customers and Payment to Suppliers7:05

6. Other Operating Costs4:10

7. Transactions with Non-Current Assets8:09

8. Bank Loans and Interest4:03

9. Taxes, Closing Entries and Payments of Dividends5:44

10. Preparing the Balance Sheet3:54

11. Preparing the Income Statement4:30

12. Introducing the Cash Flow Statement I7:29

13. Introducing the Cash Flow Statement II4:03

14. Recap of Week 3 and Conclusions3:12

Rencontrer les enseignants

Marc Badia
Assistant Professor
Accounting and Control

[MUSIC]

In this video we are going to prepare the balance sheet.

Remember, the first and most important financial statement.

So all the accounts are included on the balance sheet, and

therefore the first thing that we need to do is take the T-accounts that we have and

calculate the ending balance of each one of the accounts.

So as you see here,

we have calculated all the ending balances by adding all the debits and

credits on each account together with the beginning balance, remember?

And so we get an ending balance.

And now this ending balance is going to be the balance that

shows on the balance sheet for each account.

And so what we are getting here is a picture as of December 31st of year x2.

Now, know that all the ending balances of all the assets and

the ending balances of owner's equity and liabilities have to

add up to the same amount to respect the basic accounting equality.

If that is not the case, it means that we made a mistake in one of the transactions.

Because in every single transaction, all the debits and

credits have to be the same.

This is the way to make sure that the basic accounting equality always holds.

So what we do here is now taking all these ending balances,

I'm placing them here on the balance sheet.

Organizing all the accounts, and their current assets, noncurrent assets,

current liabilities, noncurrent liabilities, and owner's equity.

As you see here, he accounts are classified on the asset side from

more liquidity to less liquidity.

On the liabilities and

owner's equity side, they are classified from shorter maturity to longer maturity.

Share capital and retain profits, they don't have any maturity,

we don't have any obligation to pay that money to anyone.

I'm sure you remember that dividends are voluntary,

I mean we don't have any obligation to pay dividends.

I show you dividends have to be approved by all the shareholders in the company.

So shareholders have to vote in the annual shareholders meeting to approve

the dividend payments.

Okay, so what you see on this balance sheet is that we have lot of cash, and

also marketable securities that actually are very close to cash.

Because at any point in time we can sell these Apple shares in the stock market and

get the cash to use it immediately.

So the company has a lot of liquidity.

Actually, if you take a look at current assets,

they are much bigger than current liabilities.

Remember, current liabilities is the amount that the company has to repay

within the next year.

Current assets are cash and other assets that

are close to cash that are going to turn into cash in the short run.

Like accounts receivable that we are going to collect in 60 days or

less than 60 days, or inventories that we expect to sell and also collect the cash.

Therefore, in the case of this company, it looks like there is a good balance,

financing balance between current assets and current liabilities.

We also can look at this from the point of view of noncurrent assets.

As you see here, long-term sources of capital, such as the bank loan,

the long-term bank loan of 30,000 euros plus owner's equity are more than enough

to cover the fixed assets that we have.

Actually in this business, as you see, fixed assets or

noncurrent assets, are very small in proportion to current assets.

This is typical of commercial businesses where what you have are inventories,

account receivable, but you don't need big investments

in noncurrent assets such as machinery or factories, etc.

This balance sheet is a picture of the point in time as of December 31st

of year x2.

And so we don't have a sense of what happened during the year.

To do that, we should compare this to the beginning balance in the beginning of

the year, and this is something I'm going to do next week.

So next week I'm going to analyze a little bit more the evolution of

the financial statements in this company.

For the moment, let's leave it here.

In the next video, we are going to prepare the income statement.

So we're going to learn a little bit more about what happened

during the year with the profit and loss accounts.

[MUSIC]

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