Analysis of the Balance Sheet and a Summary

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Do curso por University of Virginia

Financial Accounting Fundamentals

277 ratings

University of Virginia

Financial Accounting Fundamentals

277 ratings

This course will teach you the tools you'll need to understand the fundamentals of financial accounting. Concise videos, the financial records of a small business, and "your turn" activities guide you through the three most commonly used financial statements: the Balance Sheet, the Income Statement, and the Statement of Cash Flows. Beyond recording transactions, you'll learn how to prepare these financial statements, and read and analyze them to draw basic conclusions about a company's financial health. By the end of this course, you will be able to: - Use journal entries to record transactions; - Prepare and use t-accounts to summarize transactions recorded during an accounting period; - Describe the three most commonly used financial statements and how they fit together; - Prepare these financial statements based on transactions recorded during an accounting period; and - Draw basic conclusions about a company's financial health.

Na lição

More Transactions, Analysis of Financial Statements, and an Annual Report

During this last week, we’ll walk through the second year of operations for our fictional startup company, The Garden Spot (TGS Year 2), for additional practice recording transactions and preparing our end-of-period financial statements. Then, we’ll do some analysis of The Garden Spot’s financial statements. Finally, we’ll take a look at PepsiCo’s Annual Report as an example of reporting for a publicly traded U.S. company.

Analysis of the Income Statement6:50

Analysis of the Statement of Cash Flows4:49

Analysis of the Balance Sheet and a Summary5:47

Conheça os instrutores

Luann J. Lynch
Almand R. Coleman Professor of Business Administration
Darden School of Business

We've looked at the income statement and the statement of cash flows.

Now let's move to the balance sheet.

Here, we can make some of the same observations we made when we looked

at the statement of cash flows, which shouldn't be that surprising given how

closely these two financial statements are linked.

Recall that on the statement of cash flows,

we saw a lot of investment activity.

Well, that investing activity has led to a substantial increase in the company's

total assets.

We saw a lot of land purchased.

And we see a few more receivables in inventory because of the growth

in revenues.

Let's look for a minute at a ratio called the current ratio.

This ratio was calculated as current

assets divided by current liabilities.

It can help us assess a company's liquidity or

how quickly it can turn things into cash, if needed.

Remember, the current assets are those that the company expects to use on

operations or convert to cash within a year.

And the current liabilities are those liabilities that are due within a year.

A ratio of current assets to current liabilities less than one often raises

concern because the company has more liabilities that it must pay within a year

than it has assets that it expects to be able to convert to cash within the year.

The Garden Spot's current ratio for

year one is 3.6.

And I calculate that by taking current assets,

which total to 108,010, and divide by current liabilities.

A total of 30,000.

The ratio in year two is 2.7.

Calculate that by taking current

assets that total 166,110 and

divide that by the current liabilities for

the year of 61,775.

Now, neither of these suggests concerns because they're substantially greater than

one, but certainly something that we need to look at to assess liquidity.

Let's now look to see how much of our assets are financed by debt

using the debt, To assets ratio.

This ratio is calculated as total liabilities divided by total assets.

This is a common ratio to look at when looking at the balance sheet

to try to draw some inferences about a company's financing decisions,

whether it has chosen to rely more heavily on debt or on equity for funds.

In year one, That ratio, here, is 0.48.

I calculated that by taking total liabilities of

60,000 and dividing by the total assets.

The 0.48 suggests that 48% of the company's assets were financed by debt.

So the remaining 52%, then, were financed by equity.

The debt to asset ratio increased to 0.62 in the second year.

There, I calculated that by taking total liabilities

of 171,775 and dividing that by total assets.

Now, this is consistent with what we saw when we looked at the statement of cash

flows.

There we saw more financing through debt in the second year than in the first year.

The last thing that I will point out on the balance sheet is that the company does

have a positive retained earnings balance, In both year one and

year two, as the company has been generating and retaining earnings.

Now, let me summarize what we've done.

We've looked at the income statement to get a sense of the company's growth,

profitability and the relationship between revenues and certain costs.

We looked at the statement of cash flow to determine whether cash flow was positive

or negative, whether the company was generating cash flow from day to day

operations, what it was investing in and how it was financing those investments.

And then, finally, we looked at the balance sheet to see what assets

the company has, how it has chosen to finance the purchase of those assets and

how much earning the company has retained since its inception.

Now, this is a fairly simple, but important, start.

It's important for managers to review the financial statements on

an ongoing basis to be able to make key observations about the business.

We have taken a first step toward that with the financial statements from

the first two years of operation at the Garden Spot, where we saw an entrepreneur

who was able to generate a positive cash flow from operations in her second year

by growing the business quickly enough to cover its base of fixed operating costs.

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