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R-Sas Macs 5
R-Sas Macs 5
SAS: Module 5
References:
https://
corporatefinanceinstitute.com/
1. resources/knowledge/
accounting/statement-of-cash-
flows/
https://online.hbs.edu/blog/
post/how-to-prepare-a-balance-
sheet
https://online.hbs.edu/blog/
post/how-to-prepare-a-cash-flow-
statement
Productivity Tip:
A. LESSON PREVIEW/REVIEW
1) Introduction (2 mins)
Good day! Previously, you learned about how a business determines the result of its business
operation. Have you ever wondered whether a business who generates income is:
● Financially stable?
● Able to sustain future operation?
● Not susceptible to bankruptcy?
One account in the “Current Asset Section of the balance sheet is Cash, do you have any idea how cash
is generated by the company and how it is spent?
In this module, you will learn how cash are generated and spent by the business and how to prepare a
balance sheet.
Do you have any idea what a balance sheet is and how to prepare such? Try to answer the
questions below by writing your ideas on the first column “What I Know”. You can write keywords or
phrases that relates to the questions.
statement?
B.MAIN LESSON
I. BALANCE SHEET
The balance sheet is one of the three fundamental financial statements and is key to both financial
modeling and accounting. The balance sheet displays the company’s total assets, and how these assets are
financed, through either debt or equity. It can also be referred to as a statement of net worth, or a statement of
financial position. The balance sheet is based on the fundamental equation:
As such, the balance sheet is divided into two sides (or sections). The left side of the balance sheet
outlines all of a company’s assets. On the right side, the balance sheet outlines the
company’s liabilities and shareholders’ equity. On either side, the main line items are generally classified by
liquidity. More liquid accounts such as Inventory, Cash, and Trades Payables are placed before illiquid
accounts such as Plant, Property, and Equipment (PP&E) and Long-Term Debt. The assets and liabilities are
also separated into two categories: current asset/liabilities and non-current (long-term) assets/liabilities.
Balance sheets, like all financial statements, will have minor differences between organizations and
industries. However, there are several “buckets” and line items that are almost always included in common
balance sheets. We briefly go through commonly found line items under Current Assets, Long-Term Assets,
Current Liabilities, Long-term Liabilities, and Equity.
Current Assets
The most liquid of all assets, cash, appears on the first line of the balance sheet. Cash Equivalents are
also lumped under this line item and include assets that have short-term maturities under three months or
assets that the company can liquidate on short notice, such as marketable securities. Companies will generally
disclose what equivalents it includes in the footnotes to the balance sheet.
Accounts Receivable
This account includes the balance of all sales revenue still on credit, net of any allowances for doubtful
accounts (which generates a bad debt expense). As companies recover accounts receivables, this account
decreases and cash increases by the same amount.
Inventory
Inventory includes amounts for raw materials, work-in-progress goods, and finished goods. The
company uses this account when it reports sales of goods, generally under cost of goods sold in the income
statement.
Non-Current Assets
Property, Plant, and Equipment (also known as PP&E) capture the company’s tangible fixed assets.
This line item is noted net of depreciation. Some companies will class out their PP&E by the different types of
assets, such as Land, Building, and various types of Equipment. All PP&E is depreciable except for Land.
Intangible Assets
This line item includes all of the company’s intangible fixed assets, which may or may not be
identifiable. Identifiable intangible assets include patents, licenses, and secret formulas. Unidentifiable
intangible assets include brand and goodwill.
Current Liabilities
Accounts Payable
Accounts Payables, or AP, is the amount a company owes suppliers for items or services purchased on
credit. As the company pays off their AP, it decreases along with an equal amount decrease to the cash
account.
Includes non-AP obligations that are due within one year’s time or within one operating cycle for the
company (whichever is longest). Notes payable may also have a long-term version, which includes notes with
a maturity of more than one year.
This account may or may not be lumped together with the above account, Current Debt. While they
may seem similar, the current portion of long-term debt is specifically the portion due within this year of a
piece of debt that has a maturity of more than one year. For example, if a company takes on a bank loan to be
paid off in 5-years, this account will include the portion of that loan due in the next year.
Non-Current Liabilities
Bonds Payable
This account includes the amortized amount of any bonds the company has issued.
Long-Term Debt
This account includes the total amount of long-term debt (excluding the current portion, if that account
is present under current liabilities). This account is derived from the debt schedule, which outlines all of the
company’s outstanding debt, the interest expense, and the principal repayment for every period.
Shareholders’ Equity
Share Capital
This is the value of funds that shareholders have invested in the company. When a company is first
formed, shareholders will typically put in cash. For example, an investor starts a company and seeds it with
$10M. Cash (an asset) rises by $10M, and Share Capital (an equity account) rises by $10M, balancing out the
balance sheet.
Retained Earnings
This is the total amount of net income the company decides to keep. Every period, a company may pay
out dividends from its net income. Any amount remaining (or exceeding) is added to (deducted from) retained
earnings.
A balance sheet should always balance. The name itself comes from the fact that a company’s assets will
equal its liabilities plus any shareholders’ equity that has been issued. If you find that your balance sheet is not
truly balancing, it may be caused by one of these culprits:
Errors in inventory
Miscalculated equity calculations
Miscalculated loan amortization or depreciation
Here are the steps you can follow to create a basic balance sheet for your organization. Even if some or
all of the process is automated through the use of an accounting system or software, understanding how a
balance sheet is prepared will enable you to spot potential errors so that they can be resolved before they cause
lasting damage.
A balance sheet is meant to depict the total assets, liabilities, and shareholders’ equity of a company on
a specific date, typically referred to as the reporting date. Often, the reporting date will be the final day of
the reporting period.
Most companies, especially publicly traded ones, will report on a quarterly basis. When this is the case,
the reporting date will most usually fall on the final day of the quarter:
Q1: March 31
Q2: June 30
Q3: September 30
Q4: December 31
Companies that report on an annual basis will often use December 31st as their reporting date, though
they can choose any date.
It's not uncommon for a balance sheet to take a few weeks to prepare after the reporting period has
ended.
After you’ve identified your reporting date and period, you’ll need to tally your assets as of that date.
Typically, a balance sheet will list assets in two ways: As individual line items and then as total assets.
Splitting assets into different line items will make it easier for analysts to understand exactly what your assets
are and where they came from; tallying them together will be required for final analysis.
Current Assets:
Cash and cash equivalents
Short-term marketable securities
Accounts receivable
Inventory
Other current assets
Non-current Assets:
Long-term marketable securities
Property
Goodwill
Intangible assets
Other non-current assets
Current and non-current assets should both be subtotalled, and then totalled together.
Similarly, you will need to identify your liabilities. Again, these should be organized into both line items
and totals, as below:
Current Liabilities:
Accounts payable
Accrued expenses
Deferred revenue
Non-Current Liabilities:
Deferred revenue (non-current)
Long-term lease obligations
Long-term debt
Other non-current liabilities
As with assets, these should be both subtotalled and then totalled together.
If a company or organization is privately held by a single owner, then shareholders’ equity will
generally be pretty straightforward. If it’s publicly held, this calculation may become more complicated
depending on the various types of stock issued.
Common line items found in this section of the balance sheet include:
Common stock
Preferred stock
Treasury stock
Retained earnings
To ensure the balance sheet is balanced, it will be necessary to compare total assets against total
liabilities plus equity. To do this, you’ll need to add liabilities and shareholders’ equity together.
If you’ve found that the balance sheet doesn't balance, there's likely a problem with some of the
accounting data you've relied on. Double check that all of your entries are, in fact, correct and accurate. You
may have omitted or duplicated assets, liabilities, or equity, or miscalculated your totals.
Balance sheets are one of the most critical financial statements, offering a quick snapshot of the financial health
of a company. Learning how to generate them and troubleshoot issues when they don’t balance is an
invaluable financial accounting skill that can help you become an indispensable member of your organization.
The balance sheet is a very important financial statement for many reasons. It can be looked at on its own, and
in conjunction with other statements like the income statement and cash flow statement to get a full picture of
a company’s health.
1. Liquidity – Comparing a company’s current assets to its current liabilities provides a picture of
liquidity. Current assets should be greater than current liabilities so the company can cover its short-
term obligations. The Current Ratio and Quick Ratio are examples of liquidity financial metrics.
2. Leverage – Looking at how a company is financed indicates how much leverage it has, which in turn
indicates how much financial risk the company is taking. Comparing debt to equity and debt to total
capital are common ways of assessing leverage on the balance sheet.
3. Efficiency – By using the income statement in connection with the balance sheet it’s possible to assess
how efficiently a company uses its assets. For example, dividing revenue into fixed assets produces
the Asset Turnover Ratio to indicate how efficiently the company turns assets into revenue.
Additionally, the working capital cycle shows how well a company manages its cash in the short term.
4. Rates of Return – The balance sheet can be used to evaluate how well a company generates returns.
For example, dividing net income into shareholders’ equity produces Return on Equity (ROE), and
dividing net income into total assets produces Return on Assets (ROA), and dividing net income into
debt plus equity results in Return on Invested Capital (ROIC).
A cash flow statement is a financial report that details how cash entered and left a business during a
reporting period.
According to the online course Financial Accounting: “The purpose of the statement of cash flows is to
provide a more detailed picture of what happened to a business’s cash during an accounting period.”
Since cash flow statements provide insight into different areas a business used or received cash during a
specific period, they’re important financial statements when it comes to valuing a company and understanding
how it operates.
A typical cash flow statement comprises three sections: cash flow from operating activities, cash flow from
investing activities, and cash flow from financing activities.
The first step in preparing a cash flow statement is determining the starting balance of cash and cash
equivalents at the beginning of the reporting period. This value can be found on the income statement of the
same accounting period.
The starting cash balance is necessary when leveraging the indirect method of calculating cash flow
from operating activities. However, the direct method doesn’t require this information.
One you have your starting balance, you need to calculate cash flow from operating activities. This step
is crucial because it reveals how much cash a company generated from its operations.
Cash flow from operations are calculated using either the direct or indirect method.
Direct Method
The direct method of calculating cash flow from operating activities is a straightforward process that
involves taking all the cash collections from operations and subtracting all the cash disbursements from
operations. This approach lists all the transactions that resulted in cash paid or received during the
reporting period.
Indirect Method
The indirect method of calculating cash flow from operating activities requires you to start with net
income from the income statement (see step one above) and make adjustments to “undo” the impact of
the accruals made during the reporting period. Some of the most common and consistent adjustments
include depreciation and amortization.
Both the direct and indirect methods will result in the same number, but the process of calculating cash
flow from operations differs.
While the direct method is easier to understand, it’s more time-consuming because it requires
accounting for every transaction that took place during the reporting period. Most companies prefer the
indirect method because it's faster and closely linked to the balance sheet. However, both methods are
accepted by Generally Accepted Accounting Principles (GAAP) and International Financial Reporting
Standards (IFRS).
After calculating cash flows from operating activities, you need to calculate cash flows from investing
activities. This section of the cash flow statement details cash flows related to the buying and selling of long-
term assets like property, facilities, and equipment. Keep in mind that this section only includes investing
activities involving free cash, not debt.
The third section of the cash flow statement examines cash inflows and outflows related to financing
activities. This includes cash flows from both debt and equity financing—cash flows associated with raising
cash and paying back debts to investors and creditors.
When using GAAP, this section also includes dividends paid, which may be included in the operating
section when using IFRS standards. Interest paid is included in the operating section under GAAP, but
sometimes in the financing section under IFRS as well.
Once cash flows generated from the three main types of business activities are accounted for, you can
determine the ending balance of cash and cash equivalents at the close of the reporting period.
The change in net cash for the period is equal to the sum of cash flows from operating, investing, and
financing activities. This value shows the total amount of cash a company gained or lost during the reporting
period. A positive net cash flow indicates a company had more cash flowing into it than out of it, while a
negative net cash flow indicates it spent more than it earned.
To help visualize each section of the cash flow statement, here’s an example of a fictional company generated
using the indirect method.
This cash flow statement is for a reporting period that ended on Sept. 28, 2019. As you'll notice at the
top of the statement, the opening balance of cash and cash equivalents was approximately $10.7 billion.
During the reporting period, operating activities generated a total of $53.7 billion. The investing
activities section shows the business used a total of $33.8 billion in transactions related to investments. The
financing activities section shows a total of $16.3 billion was spent on activities related to debt and equity
financing.
At the bottom of the cash flow statement, the three sections are summed to total a $3.5 billion increase
in cash and cash equivalents over the course of the reporting period. Therefore, the final balance of cash and
cash equivalents at the end of the year equals $14.3 billion.
FINANCIAL DECISION-MAKING
Whether you’re a manager, entrepreneur, or individual contributor, understanding how to create and
leverage financial statements is essential for making sound business decisions.
The statement of cash flows is one of the most important financial reports to understand because it
provides detailed insights into how a company spends and makes its cash. By learning how to create and
analyze cash flow statements, you can make better, more informed decisions, regardless of your position.
Exercise 1. Prepare a balance sheet for Teddy Fab., Inc. for the year ended December 31, 2100 given the
data below: (in $)
Exercise 2: The following information is available from the books of Exclusive Ltd. for the year
ended 31st March, 2016:
(a) Cash sales for the year were Rs.10,000,000 and sales on account Rs.12,000,000.
(b) Payments on accounts payable for inventory totaled Rs.7,800,000.
(c) Collection against accounts receivable were Rs.7,600,000.
(d) Rent paid in cash Rs.2,200,000, outstanding rent being Rs.200,000.
(e) 4,000,000 Equity shares of Rs.10 par value were issued for Rs.48,000,000.
(f) Equipment was purchased for cash Rs.16,800,000.
(g) Dividend amounting to Rs.10,000,000 was declared, but yet to be paid.
(h) Rs.4,000,000 of dividends declared in the previous year were paid.
(i) An equipment having a book value of Rs.1,600,000 was sold for Rs.2,400,000.
(j) The cash account was increased by Rs.37,200,000.
You can now answer the questions in the “What I Know” chart in activity 1.
B. LESSON WRAP-UP
FAQs
No, a balance sheet that is balanced ( assets = liabilities + capital) does not indicate that its accurate.
It is possible that a certain transaction was not recorded which would result to overstatement or
understatement on both the assets and liabilities or capital.
No. If a business transaction affects only income and expense, then it does not affect the balance
sheet. Only transactions involving assets, liabilities and capital have an effect on the balance sheet.
For purposes of keeping track of earnings and expenditures, it is necessary for a business,
whether small, medium or large, to prepare a cash flow statement.
No, a cash flow statement shows only the cash generated and spent by the business while an
income statement shows the income earned by the business regardless of the cash on hand. There are
recognized income and expenses in the income statement where there was no cash received or paid
while the cash flow statement reflects actual cash received or disbursed regardless of when actually
spent.