Finance Research

Topics: Generally Accepted Accounting Principles, Balance sheet, Inventory Pages: 59 (8592 words) Published: September 6, 2013
THE BALANCE SHEET POCKETBOOK
By Anne Hawkins and Clive Turner
Drawings by Phil Hailstone “A uniquely accessible guide - if you only read one book on finance, read this!” Peter Colley, Director of Finance and Membership Services, RAC Motoring Services Ltd “The authors’ wealth of practical experience and understanding of the line manager’s perspective is fully reflected in this clear and readable book.” Ray Jennings, Human Resources Director, Dowty Aerospace

CONTENTS
INTRODUCTION 1 THE BALANCE SHEET Use of Funds (Fixed Assets, Working Capital), Source of Funds, the balancing act, published format PROFIT AND LOSS ACCOUNT Profit is not cash, operating profit, financing costs, published format 35 APPENDIX ONE Jargon explained APPENDIX TWO Calculating depreciation 45

2

THE BUSINESS FINANCIAL MODEL Sources of Funds, Uses of Funds, making profit, summary CLASSIFICATION OF EXPENDITURE Why classify? Capital or Revenue? control FINANCIAL REPORTS Introduction

5 69

93 101

NB
41

This symbol refers the reader back to a previous section where the item or term has already been explained

INTRODUCTION

1

INTRODUCTION

Fix

CONFUSED?
Wo r k i n g Cap ital
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Re

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Ass

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Credit
lE apita C mp

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Debto

Deprecia
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2

Many people are discouraged in their attempts to understand financial statements by the jargon accountants use ... and a fear of numbers!

INTRODUCTION

DON’T BE PUT OFF!
Use the Structured process: Step One: Step Two: Step Three: Develop a ‘common sense’ model of business finance Understand the impact of capital and revenue expenditure on this Business Financial Model Extract from this Model the - Balance Sheet - Profit and Loss Account

3

INTRODUCTION

COMMON MISCONCEPTIONS
Listed below are some of the more common misconceptions we, the authors, encounter in our training sessions. See if any of them seem familiar ... x x

‘The Balance Sheet tells me the value of the business’ ‘At the year-end the retained profit must be somewhere; in the bank, or the accountant’s drawer’ ‘If the company’s share price rises it has more money’ ‘If I compare the results of two businesses, the one which has made more profit has done better’ ‘The accountant balances the Balance Sheet by entering a balancing figure somewhere ... probably profit’

x x

x

These misconceptions will be dealt with at appropriate points in the book. 4

2

THE BUSINESS FINANCIAL MODEL
Page Introduction Source of Funds Uses of Funds Making Profit Summary 6 9 18 28 31 5

THE BUSINESS FINANCIAL MODEL

2

INTRODUCTION
In this section a Business Model is developed which explains in straightforward terms how money works within the business.

6

THE BUSINESS FINANCIAL MODEL

2

THE MODEL
SHARE CAPITAL LOAN CAPITAL RETAINED PROFITS

SOURCE OF FUNDS USE OF FUNDS
FACILITIES / PROCESSES FIXED ASSETS Depreciation PRODUCTS / SERVICES WORKING CAPITAL Sales Less: Attributable Cost Operating Profit Less: Less: Dividend Interest Tax Earnings Retained Profits

7

THE BUSINESS FINANCIAL MODEL

2

APPLYING THE MODEL
Use the model to understand your business
q q q q

How is your business funded? What have you used this money for? How much profit do you make? IS IT WORTH THE EFFORT?

Make the Business Model and Financial Reports work for you! Let’s start at the beginning

8

THE BUSINESS FINANCIAL MODEL

2

SOURCE OF FUNDS
Most businesses need long-term finance, ie: money that is being invested in the business on a long-term basis, to allow it to achieve its aims. There are three categories of long-term finance: q q q

Share capital Loan capital Retained profits

Each of these has different investor expectations and implications for the way the business is run. Most companies will choose to have a mix of the three types.

9

THE BUSINESS FINANCIAL MODEL

2

SOURCE OF FUNDS
SHARE CAPITAL...
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