Modelling financial accounts: balance sheet line items

Key balance sheet items in modelling financial accounts are summarised below.

Financial accounts: balance sheet items

Cash

Cash held in the company’s bank accounts.

Debtors

Equals receivables – the amount of money owed by customers.

Stock

Equals inventories – stocks of goods held ‘on the shelf’ prior to sale.

Overdraft

Short term borrowings.

Trade creditors

Equals payables – the amount of money owed to suppliers.

Tax and other creditors

Amounts owed to tax authorities, as well as any amounts owed to other non-trade creditors (an example might be loans directors have made to the company).

Long term debt

Long term bank borrowings.

Net assets

Equals shareholders’ funds equals shareholders’ equity equals owners’ equity.  It’s the difference between what the assets the business owns and the liabilities the business owes.

Other liability items

Other common liability items might include provisions and deferred income.

Imagine a company that receives cash in front from customers who pre-pay e.g. annual subscriptions or service contracts. The company receives all the cash up front (assets go up on the balance sheet), but the business also has a liability to provide the goods or service over the term of the contract. Deferred income is a corresponding liability, reflecting the fact that (or perhaps reminding) the business that it still has an obligation to perform the work.

Imagine a company that felt it had to meet big restructuring costs, totalling 3m. The business might expense all of the restructuring costs up front but, imagine that only 1m of the restructuring had been completed by the end of the first financial year. The business would create a provision, a liability recognising that it was still due to complete 2m of restructuring.

In the next year, with 2m of restructuring due, imagine that the company revised its estimates for the restructuring down, and decided that further restructuring costs would only total 500k. With the new information, the company would unwind 1.5m of cost in its P&L.  The net result is that, in the first year, the company’s costs increased by the 3m restructuring cost. In the second year, the company’s costs reduced by 1.5m.   You can see that manipulation of provisions could provide a way of smoothing profits – increasing costs in a good year and then unwinding the provision, reducing costs in a bad year!

Proceed with the finance for non-financial managers training course

The finance for non-financial managers training course continues to look at key cash flow statement line items.