Structure of a company’s balance sheet. Analysis of assets and liabilities structure

Balance sheet or statement of financial position is a summary of a person's or organization's assets, liabilities and ownership equity on a specific date, such as the end of its financial year. A balance sheet is often described as a snapshot of a company's financial condition. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time.

A company balance sheet has three parts: assets, liabilities and shareholders' equity. The main categories of assets are usually listed first and are followed by the liabilities. The difference between the assets and the liabilities is known as the net assets or the net worth of the company.

Records of the values of each account or line in the balance sheet are usually maintained using a system of accounting known as the double-entry bookkeeping system.

Assets and liabilities are listed in order of liquidity. Usually, cash comes first, followed by current assets -- accounts and notes receivable -- and fixed assets such as land, building and equipment. On the right-hand side, current liabilities -- accounts and notes payable -- are listed first, followed by long-term liabilities such mortgage payable. The owners' equity, which consists of the initial investment, common stock and retained earnings, follows the liabilities' section.

Structure.Guidelines for corporate balance sheets are given by the International Accounting Standards Committee and numerous country-specific organizations.

Assets

Current assets

inventories, accounts receivable ,cash and cash equivalents

Long-term assets

1. property, plant and equipment

2. investment property, such as real estate held for investment purposes

3. intangible assets

4. financial assets (excluding investments accounted for using the equity method, accounts receivables, and cash and cash equivalents)

6. biological assets, which are living plants or animals. Bearer biological assets are plants or animals which bear agricultural produce for harvest, such as apple trees grown to produce apples and sheep raised to produce wool.

Liabilities

1. accounts payable

2. provisions for warranties or court decisions

3. financial liabilities (excluding provisions and accounts payable), such as promissory notes and corporate bonds

4. liabilities and assets for current tax

5. deferred tax liabilities and deferred tax assets

6. minority interest in equity

7. issued capital and reserves attributable to equity holders of the parent company

Equity

The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders' equity.

1. numbers of shares authorised, issued and fully paid, and issued but not fully paid

2. par value of shares

3. reconciliation of shares outstanding at the beginning and the end of the period

4. description of rights, preferences, and restrictions of shares

5. treasury shares, including shares held by subsidiaries and associates

6. shares reserved for issuance under options and contracts

7. a description of the nature and purpose of each reserve within owners' equity

38. Financial planning process. Budgeting.

Corporate financial planning (FP) - it is a process, in which a firm:

o Formulates a set of consistent business and financial objectives;

o Identifies where management would like to have the firm in the future;

o Projects the financial impact of alternative operating strategies with respect to different financial policies (capital structure policy, dividend policy, etc);

o Evaluates these impacts and decides which financial policies to adopt and what sort of long-term and short-term financing program to pursue; and

o Prepares contingency plans in addition to basic financial strategies in case future events differ from those now expected.

FP involves analyzing the interactions among the capital investment, capital structure, dividend, liquidity, financing, and liability management options available to the firm.

FP helps a firm evaluate anticipated returns and risks and determine a reasonable set of strategies, which are embodied in its financial plan.

FP typically consists of two phases. First, the firm prepares a long-term financial plan. Most companies have a long-term planning period of between 3 and 5 years. Second, the firm also prepares a more detailed short-term financial plan. Companies update their financial plan annually.

The principal componentsof an effective corporate financial plan include:

o A clear statement of the corporation’s strategic, operating and financial objectives;

o A clear statement of the business and economic assumptions, on which the plan is based;

o A description of basic business strategies that will be applied;

o An outline of the planned capital expenditure programs, divisions and product lines, expansion, acquisitions, replacement of existing equipment, etc.);

o An outline of the planned financing programs, (i.e. preferred stock, common stock, long-term debt)

FP to a large extent involves forecasting. Forecasting concentrates on the expected outcome. Forecasts related to FP: sales forecasts, forecasts of fixed and variable costs.

Budgeting is an integral part of a company’s financial management and planning. Budget represents a specific quantitative goal that is set as an objective for a company or department, reflecting a management plan for business growth and development.

Budget period is the time frame, for which the budgets are being compiled, and during which they are being adjusted.

Budgets perform three basic functions for the company. First, they indicate the amount and timing of the firm’s needs for future financing. Second, they provide the basis for taking corrective action in case when budgeted figures do not match actual or realized figures. Third, budgets provide benchmarks that can be used to evaluate the performance of people responsible for carrying out those plans and, in turn, controlling their actions.

Budgets should be focused not only on figures, but also on actions and company’s strategies. Budgets are composed with the help of special modes (consumption model, price model) and of course to a large extend rely on the firm’s forecasts. Nowadays budgets are created with the help of special software packages.