The definitive guide to Managing the Numbers
The definitive guide to Managing the Numbers
The definitive guide to Managing the NumbersThe definitive guide to Managing the Numbers

Chapter 15 – Building Balance Sheets

‘It is puzzling, to say the least, that airlines can routinely operate without showing any planes on their balance sheet.’
Andrew Crockett

Overview

The previous chapter looked at the profit and loss account. This chapter reviews the balance sheet: a snapshot of what a business owns and owes, and it’s net worth. Balance sheets are actually remarkably straightforward. They reveal a great deal of information about a company’s financial status, but they are little more than a rearrangement of the categories of spending and revenue which we have already met. Indeed, since they are so simple, this chapter takes the opportunity to slip in a handful of new beanie buzz words. You should enjoy them.

Mastering

After reading this chapter, you should be able to answer the following questions:

  • Why is the balance sheet important? Does it show financial flows or a snapshot of financial balances at a point in time? Could it be easily manipulated?
  • Assets less liabilities equals what? Who owns the shareholders’ equity? What is net worth?
  • Why distinguish between short- and long-term assets? Is working capital measured by current assets less current liabilities? Why is working capital important?
  • How are fixed assets shown in a balance sheet? How is depreciation shown?
  • Could a company use a short-term loan to buy long-lived assets? Should it?
  • Why is some taxation deferred? Could this be an asset?
  • What is a provision? What is a contingent liability? Why should the balance sheet show provisions for probable obligations? Why should contingent liabilities be reported in the footnotes?
  • What is contributed capital? What is treasury stock? What are retained earnings?
  • Where are other unrealized gains and losses reported? What is comprehensive income?
  • How would you use the figures from the previous few chapters to create a balance sheet?
The Definitive Guide to Managing the Numbers