Bocconi Learning to Read a Balance Sheet PDF

LEARNING TO READ A BALANCE SHEET 30060 – MANAGEMENT Walsh Book Prof. Alessandro Minichilli Department of Management & Technology LEARNING TO READ A BALANCE SHEET 2 AGENDA 1. ASSETS: FIXED ASSETS 2. ASSETS: C...

LEARNING TO READ A BALANCE SHEET 30060 – MANAGEMENT Walsh Book Prof. Alessandro Minichilli Department of Management & Technology LEARNING TO READ A BALANCE SHEET 2 AGENDA 1. ASSETS: FIXED ASSETS 2. ASSETS: CURRENT ASSETS 3. LIABILITIES: OWNER’S FUNDS 4. LIABILITIES: LONG-TERM LOANS 5. LIABILITIES: CURRENT LIABILITIES 6. USED AGGREGATIONS 7. SUMMARY OF MAIN POINTS LEARNING TO READ A BALANCE SHEET 3 Recall the definition of Balance Sheet (B/S) A snapshot of the assets used by the company and the funds that are related to these assets at an instant in time LEARNING TO READ A BALANCE SHEET 4 Cash flow statement Balance Balance sheet sheet Profit and loss statement 31/12/2021 31/12/2020 LEARNING TO READ A BALANCE SHEET 5 Assets and Assets​ Liabilities​ Liabilities always List of items of value owned by the business Amounts due to third parties, including balance the owners Uses Funds e.g. how did the e.g. where did 1000 $ company spend 1000 $ come from Total = 1,000 € Total = 1,000 € LEARN TO READ A BALANCE SHEET 6 The 5 boxes Assets​ Liabilities​ of the Fixed assets​ Owners’ funds​ Balance Net fixed assets​ Issued common stocks​ Sheet Investments​ Capital reserves Intangibles Revenue reserves Long-term loans Current assets​ Bank loans Bonds issued Inventories Accounts receivable Cash and cash equivalents Current liabilities​ Miscellaneous Short term loans Accounts payable Miscellaneous LEARNING TO READ A BALANCE SHEET 7 We define ASSETS Assets are resources controlled by the firm as a result of past events and from which future economic benefits are expected to flow to the firm. LEARNING TO READ A BALANCE SHEET 8 We define LIABILITIES Liabilities are the financial obligations a company owes to outside parties.  1.0 FIXED ASSETS FIXED ASSETS 10 Assets​ Liabilities​ Fixed assets​ Owners’ funds​ Net fixed assets​ Issued common stocks​ Investments​ Capital reserves Intangibles Revenue reserves Long-term loans Current assets​ Bank loans Inventories Bonds issued Accounts receivable Cash and cash equivalents Current liabilities​ Miscellaneous Short term loans Accounts payable Miscellaneous FIXED ASSETS 11 We define NET FIXED ASSETS Physical items needed for the operations of the firm. Application: machineries, computers, buildings. FIXED ASSETS 12 Fixed Assets MACHINERIES COMPUTERS BUILDINGS FIXED ASSETS 13 We define INVESTMENTS Shares in other (non-consolidated) companies FIXED ASSETS 14 Which one is an investment? owns 10% owns 100% FIXED ASSETS 15 We define INTANGIBLES Assets that do not have a physical presence but have a value for firm’s activities. Application: Patents, Reputation, Goodwill FIXED ASSETS 16 Patents DEFINITION A government license that gives the holder exclusive rights to a process, design or new invention for a designated period of time Source: Investopedia FIXED ASSETS 17 Goodwill Definition Example The value of intangibles in another Company A pays 125$ for company company that the focal one has B. Company B’s net assets are 100$. acquired, as reflected in the price it On consolidation, the extra paid (reflected only in the consideration of 25$ is not balanced consolidated statement) by physical assets. So, an intangible asset of this amount must be created. FIXED ASSETS 18 The most valuable brands in 2023  2.0 CURRENT ASSETS CURRENT ASSETS 20 Assets​ Liabilities​ Fixed assets​ Owners’ funds​ Net fixed assets​ Issued common stocks​ Investments​ Capital reserves Intangibles Revenue reserves Long-term loans Current assets​ Bank loans Inventories Bonds issued Accounts receivable Cash and cash equivalents Current liabilities​ Miscellaneous Short term loans Accounts payable Miscellaneous CURRENT ASSETS 21 We define ACCOUNT RECEIVABLE Amount due from customers within a year (trade credit) CURRENT ASSETS 22 Account receivable WHEN CUSTOMERS CUSTOMERS UNPAID GOODS/SERVICES PURCHASE GOODS OR PAYMENTS ARE ARE RECORDED AS ACC. SERVICES ON CREDIT DEFERRED RECEIVABLES CURRENT ASSETS 23 We define CASH and EQUIVALENTS Liquidity means available to the firm CURRENT ASSETS 24 Cash and equivalents CASH SHORT TERM LOANS LIQUID SECURITIES CURRENT ASSETS 25 We define INVENTORIES Goods and raw materials held for purpose of resale Application: Ingredients for a food manufacturer. CURRENT ASSETS 26 Inventories RAW MATERIAL FINISHED PRODUCTS CURRENT ASSETS 27 We define MISCELLANOUS Other readily payable credits Application: pre-paid taxes  3.0 LIABILITIES: OWNER’S FUNDS LIABILITIES: OWNER’S FUNDS 29 Assets​ Fixed assets​ Owners’ funds​ Net fixed assets​ Issued common stocks​ Investments​ Capital reserves Intangibles Revenue reserves Long-term loans Current assets​ Bank loans Inventories Bonds issued Accounts receivable Cash and cash equivalents Current liabilities​ Miscellaneous Short term loans Accounts payable Miscellaneous LIABILITIES: OWNER’S FUNDS 30 Issued common stocks – an example NOMINAL VALUE = 2,50 $ BOOK VALUE = 11,35 $ MARKET VALUE = 22,5$ The price of a stock when it Owners’ funds (360m$) The number of common shares was issued, rather than its divided by the number of X stock price per share. It is the current market value. issued shares (32m). price quoted on the Stock i.e. 32m issued shares; par Exchange for a public company value is 2,5$; total value = or estimated price for a non- quoted company. 80m $ LIABILITIES: OWNER’S FUNDS 31 Issued common stocks Shares of ownership of the firm held by the investors (Stockholders) NOMINAL VALUE BOOK VALUE MARKET VALUE Issued Common Stock Net Worth No. of stocks No. of stocks LIABILITIES: OWNER’S FUNDS 32 We define CAPITAL RESERVES Amounts retained in the company which have been generated from sources other than normal trading (But cannot be easily distributed as dividends to shareholders). Application: Surplus deriving from the re- evaluation of one asset (e.g. Building). LIABILITIES: OWNER’S FUNDS 33 We define REVENUE RESERVES Amounts retained in the company which have been generated by trading (trading profits), often used to finance firm growth.  4.0 LIABILITIES: LONG TERM LOANS LIABILITIES: LONG TERM LOANS 35 Assets​ Liabilities​ Fixed assets​ Owners’ funds​ Net fixed assets​ Issued common stocks​ Investments​ Capital reserves Intangibles Revenue reserves Long-term loans Current assets​ Bank loans Inventories Bonds issued Accounts receivable Cash and cash equivalents Current liabilities​ Miscellaneous Short term loans Accounts payable Miscellaneous LIABILITIES: LONG TERM LOANS 36 We define LONG TERM LOANS Debts that shall be payed within 3-5 years (medium-term) or even more than 20 years (long- term). Application: Issued bonds (not due within 12 months) and Mortgage loans. LIABILITIES: LONG TERM LOANS 37 Long term loans CORPORATE BONDS MORTGAGE  5.0 CURRENT LIABILITIES CURRENT LIABILITIES 39 Assets​ Liabilities​ Fixed assets​ Owners’ funds​ Net fixed assets​ Issued common stocks​ Investments​ Capital reserves Intangibles Revenue reserves Long-term loans Current assets​ Bank loans Inventories Bonds issued Accounts receivable Cash and cash equivalents Current liabilities​ Miscellaneous Short term loans Accounts payable Miscellaneous CURRENT LIABILITIES 40 We define SHORT TERM LOANS Debts towards financial institutions or other entities (debt-holders) which are due within one year Application: Bonds to be paid within 12 months CURRENT LIABILITIES 41 We define ACCOUNTS PAYABLE Amount due to suppliers within one year CURRENT LIABILITIES 42 Account payable THE AMOUNT DUE TO THE DEFERRED AMOUNT IS GOODS OR SERVICES HAVE SUPPLIERS FOR GOODS OR RECORDED AS ACCOUNT BEEN RECEIVED SERVICES IS DEFERRED PAYABLE CURRENT LIABILITIES 43 We define MISCELLANOUS Other debts that shall be paid within 1 year Application: Current taxes and Due-dividends CURRENT LIABILITIES 44  6.0 USED AGGREGATIONS USED AGGREGATION 46 Total assets= Assets​ Liabilities​ fixed assets + Fixed assets​ Owners’ funds​ Net fixed assets​ Issued common stocks​ current assets Investments​ Capital reserves Intangibles Revenue reserves (or also ∑ liabilities) Long-term loans Current assets​ Bank loans Inventories Bonds issued Accounts receivable Cash and cash equivalents Current liabilities​ Miscellaneous Short term loans Accounts payable Miscellaneous USED AGGREGATION 47 Capital employed= Assets​ Liabilities​ owners’ funds Fixed assets​ Owners’ funds​ Net fixed assets​ Issued common stocks​ + long-term loans Investments​ Capital reserves Intangibles Revenue reserves (or also= fixed assets Long-term loans Current assets​ Bank loans + current assets Inventories Bonds issued Accounts receivable – current liabilities) Cash and cash equivalents Current liabilities​ Miscellaneous Short term loans Accounts payable Miscellaneous USED AGGREGATION 48 Working capital = Assets​ Liabilities​ current assets Fixed assets​ Owners’ funds​ - current liabilities Net fixed assets​ Investments​ Issued common stocks​ Capital reserves Intangibles Revenue reserves (or also = owners’ funds Long-term loans Bank loans + long-term liabilities - Current assets​ Bonds issued Inventories fixed assets) Accounts receivable Cash and cash equivalents Current liabilities​ Miscellaneous Short term loans Accounts payable Miscellaneous USED AGGREGATION 49 We define WORKING CAPITAL Amount of day-to-day operating liquidity available to a business. Very low (negative) working capital may pose the firm at risk of running out of money. Excessive working capital means funds which earn no profit cannot earn the required rate of return on investment  USED AGGREGATION 50 Owners’ funds = Assets​ Liabilities​ fixed assets + current assets Fixed assets​ Net fixed assets​ Owners’ funds​ Issued common stocks​ - current liabilities Investments​ Capital reserves Intangibles Revenue reserves - long-term loans Long-term loans (Total assets - Bank loans Current assets​ Bonds issued outstanding debt is Inventories Accounts receivable what belongs to Cash and cash equivalents Current liabilities​ Miscellaneous Short term loans shareholders) Accounts payable Miscellaneous  7.0 SUMMARY OF MAIN POINTS SUMMARY 52 01 02 Definitions and components of Assets Definition and computation of main and Liabilities in the Balance sheet. Financial Ratios THANK YOU