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LUMSA UniversityDepartment of Human SciencesCommunication, Education, PsychologyBusiness planning and Start upBALANCE SHEETRome March 16, 2022Prof. Debora Megnadmegna@softstrategy.it
Agenda01Balance Sheet02Business Case03ExercisesUnderstanding and analysisMaking examplesMaking examples andstarting with excel2
Balance sheet
Balance SheetBalance SheetIncome StatementStatement of Cash FlowsDescribes where theenterprise stands at aspecific date.Statement of FinancialPosition:A statement of what abusiness owns (assets),what it owes to others(liabilities), and howmuch value the ownershave invested in it(equity).4
Asset ivityPrincipleStable-EuroAssumptionThese accounting principles support costas the basis for asset valuation.5
Assets, Liabilities and EquityASSETSObligations of the Point in time or status report. More formally, Statement ofFinancial Position.LIABILITIESProperties or economicbusiness: they are claimsresources owned by aagainst the assets of thebusiness.businessThey are expected to Contains (and shows equality ofamounts of): Assets Liabilities and Owners’equityprovide future benefits tothe businessEQUITYIt is the owner’s claim onthe assets of thebusiness residualinterest in the assets ofthe business afterdeducting liabilities6
Assets, Liabilities and Equity(cont.)CashWhere does thecash go?PayablesAccounts ReceivableInventoriesAssetsBank LoansBondsWhere does thecash come from?PropertyPlant, EquipmentLiabilities Owners’EquityIntangible AssetsSharesRetained Profit7
Assets, Liabilities and Equity(cont.)Current AssetsCurrent assets are those assets of a company thatare expected to be converted to cash, sold, orCurrent AssetsCurrent Liabilitiesconsumed during the normal operating cycle ofthe business (usually one year).Current LiabilitiesLiabilities to be paid within one year of thebalance sheet date.Long-Term DebtFixed Assets:1. Tangible2. Intangible3. FinancialOperating cycleIt is the time it takes to:- pay cash to suppliers;- sell goods & service to customers;- collect cash from customers.Shareholder’sEquity8
Assets, Liabilities and Equity(cont.)Current LiabilitiesCurrent AssetsLong-Term DebtFixed Assets:1. Tangible2. Intangible3. FinancialWhat long-terminvestments should thefirm engage in?Shareholder’sEquity9
Assets, Liabilities and EquityCurrent Assets(cont.)How can the firm raiseCurrent Liabilitiesthe money for therequired investments?Fixed Assets:1. Tangible2. Intangible3. FinancialLong-Term Debt1. Financing Decision2. Capital StructureShareholder’sEquity10
Assets, Liabilities and Equity(cont.)Current Liabilitiesr e n tFixed AssetsN o n - c u rIntangible Assetsr e n tTangible AssetsN o n - c u rCurrent AssetsLong-Term FinancialDebtOther LT liabilities(ex.provisions)Equity11
Statement of owner’s equityOwner’s InvestmentOwner’s essEarningsRevenuesPayments toOwnersBusinessLossesExpenses12
Business Case
An Illustration of Balance Sheet - AssetsDicember 31,Amounts in '000A20202019Assets are economicASSETSCurrent Assets:Cash and Cash Equivalents57.020 50.500 Short-Term Investments5.000 11.000 Accounts Receivable5.000 2.500 Inventories1.500 1.000 650 500 69.170 65.500 1.000 6.000 45.000 20.000 5.000 3.500 120.170 95.000 Prepaid ExpensesTotal Current AssetsFixed Assets:InvestmentsProperty, plant and equipmentIntangible and other assetsTotal Assetsresources that areowned by the businessand are expected toprovide positive futurecash flows.14
An Illustration of Balance Sheet - LiabilitiesDicember 31,20202019Accounts payable21.000 19.000 Advertising payable15.000 14.000 8.000 6.000 Other accrued expenses payable28.000 19.000 Income taxes payable18.000 20.000 Total Current Liabilities90.000 78.000 11.000 4.000 101.000 82.000 Amounts in '000BLIABILIIESCurrent Liabilities:Compensation (salary) payableLong-Term LiabilitiesTotal LiabilitiesLiabilities aredebts thatrepresentnegative futurecash flows forthe enterprise.17
An Illustration of Balance Sheet – Stockholders’ equityDicember 31,COwners’2020201915.000 10.000 Retained Earnings3.000 5.000 Net Income / (Loss)1.170 (2.000) 19.170 13.000 claims to the120.170 95.000 assets of theAmounts in '000Stockholders' EquityCommon StockTotal Stockholders' EquityTotal Liabilities and Stockholders' EquityEquityrepresents theowners’business.19
An Illustration of Balance SheetDicember 31,Amounts in '0002020Total Assets120.170 LiabilitiesCurrentLong90.000 11.000 Total Liabilities Total Stockholders' Equity19.170 Total Liabilities and Stockholders' EquityAAssetsMustequal101.000 BLiabilities120.170 CEquity20
Exercises
The case of JJ’s Lawn Care ServiceWe mow lawns so youdon’t have to!Services provides: Mowing & Edging Planting and Removal Spring & Fall Cleanup Power-Washing & Painting22
The case of JJ’s Lawn Care Service: owners’ investmentOn January 1, 2020, Jill Jones and her family invested 8.000 in JJ’s Lawn Care Service andreceived 800 shares of stockCOSTSINCOME ease ( )Decrease (-)Decrease (-)Increase ( )ASSETSBALANCE ase ( )Decrease (-)Decrease (-)Increase ( )Ending balanceEnding balance23
The case of JJ’s Lawn Care Service: owners’ investmentOn January 1, 2020, Jill Jones and her family invested 8.000 in JJ’s Lawn Care Service andreceived 800 shares of stockCOSTSINCOME ALANCE SHEETACCOUNT8.000Owner's investmentCreditDebitAccount #Account nameDebitJanuary 1January 1XXXXXXCashCapital stock8.000Credit8.000GENERALJOURNALCapital stockCreditDateCredit8.00024
The case of JJ’s Lawn Care Service: assets investmentOn January 2, JJ’s purchased a riding lawn mower for 2.500 cash.COSTSINCOME ease ( )Decrease (-)Decrease (-)Increase ( )ASSETSBALANCE ase ( )Decrease (-)Decrease (-)Increase ( )Ending balanceEnding balance25
The case of JJ’s Lawn Care Service: assets investmentOn January 2, JJ’s purchased a riding lawn mower for 2.500 cash.COSTSINCOME ALANCE SHEETACCOUNTRiding lawn mower purchasedCreditDebit2.5002.500Account #Account nameDebitJanuary 2January reditDateCredit26
The case of JJ’s Lawn Care Service: assets investment(cont.)On January 8, JJ’s purchased a 15.000 truck.JJ’s paid 2.000 down in cash and issued a note payable for the remaining 13.000.COSTSINCOME ease ( )Decrease (-)Decrease (-)Increase ( )ASSETSBALANCE ase ( )Decrease (-)Decrease (-)Increase ( )Ending balanceEnding balance27
The case of JJ’s Lawn Care Service: assets investment(cont.)On January 8, JJ’s purchased a 15.000 truck.JJ’s paid 2.000 down in cash and issued a note payable for the remaining 13.000.COSTSINCOME E SHEETACCOUNTDebitTruck purchasedCreditCreditAccount ount #Account nameJanuary 8January 8January 8XXXXXXXXXCashAccount edit15.00028
The case of JJ’s Lawn Care Service: repair partsOn January 11, JJ’s purchased some repair parts for 300 on account.COSTSINCOME ease ( )Decrease (-)Decrease (-)Increase ( )ASSETSBALANCE ase ( )Decrease (-)Decrease (-)Increase ( )Ending balanceEnding balance29
The case of JJ’s Lawn Care Service: repair partsOn January 11, JJ’s purchased some repair parts for 300 on account.COSTSINCOME ALANCE SHEETACCOUNTRepair parts purchasedCreditDebitAccount #Account nameDebitJanuary 11January iesCreditDateCredit300CashDebitCredit30030
The case of JJ’s Lawn Care Service: repair parts soldJill realized she had purchased more repair parts than needed.On January 18, JJ’s was able to sell half of the repair parts to ABC Lawns for 150, a priceequal to JJ’s cost. JJ’s will receive the cash within 30 days.COSTSINCOME ease ( )Decrease (-)Decrease (-)Increase ( )ASSETSBALANCE ase ( )Decrease (-)Decrease (-)Increase ( )Ending balanceEnding balance31
The case of JJ’s Lawn Care Service: repair parts soldJill realized she had purchased more repair parts than needed.On January 18, JJ’s was able to sell half of the repair parts to ABC Lawns for 150, a priceequal to JJ’s cost. JJ’s will receive the cash within 30 days.COSTSINCOME STATEMENTACCOUNTDebitRepair partsCreditAccount receivablesDebitCreditDebitRepair parts saleCreditAccount #Account nameDebitJanuary 18January 18XXXXXXAccount receivablesRepair eCredit150BALANCE SHEETACCOUNTPP&EDebitCredit15032
The case of JJ’s Lawn Care Service: repair parts sold(cont.)On January 25, ABC Lawns pays JJ’s 75 as a partial settlement of its accounts receivable.COSTSINCOME ease ( )Decrease (-)Decrease (-)Increase ( )ASSETSBALANCE ase ( )Decrease (-)Decrease (-)Increase ( )Ending balanceEnding balance33
The case of JJ’s Lawn Care Service: repair parts sold(cont.)On January 25, ABC Lawns pays JJ’s 75 as a partial settlement of its accounts receivable.COSTSINCOME STATEMENTACCOUNTDebitCashCreditAccount receivablesDebitCreditDebitRepair parts sale (payment)CreditAccount #Account nameDebitJanuary 25January 25XXXXXXAccount DebitDateCredit75BALANCE SHEETACCOUNTCashDebitCredit7534
The case of JJ’s Lawn Care Service: repair parts paydOn January 28, JJ’s pays 150 of its accounts payable.COSTSINCOME ease ( )Decrease (-)Decrease (-)Increase ( )ASSETSBALANCE ase ( )Decrease (-)Decrease (-)Increase ( )Ending balanceEnding balance35
The case of JJ’s Lawn Care Service: repair parts paydOn January 28, JJ’s pays 150 of its accounts payable.COSTSINCOME E SHEETACCOUNTCredit150DebitAccount payables (Pay)CreditAccount payablesDebitCreditDateAccount #Account nameDebitJanuary 28January 28XXXXXXAccount payablesCash150Credit150GENERALJOURNAL15036
The case of JJ’s Lawn Care Service: revenuesOn January 29, JJ’s recorded lawn care services provided during May of 750.All clients paid in cash.COSTSINCOME ease ( )Decrease (-)Decrease (-)Increase ( )ASSETSBALANCE ase ( )Decrease (-)Decrease (-)Increase ( )Ending balanceEnding balance37
The case of JJ’s Lawn Care Service: revenuesOn January 29, JJ’s recorded lawn care services provided during May of 750.All clients paid in cash.COSTSINCOME ALANCE SHEETACCOUNTCreditDateAccount #750January 29January NALSalesCreditSales of lawn careAccount nameCredit75038
The case of JJ’s Lawn Care Service: expensesOn January 31, JJ’s purchased gasoline for the lawn mower and the truck for 50 cash.COSTSINCOME ease ( )Decrease (-)Decrease (-)Increase ( )ASSETSBALANCE ase ( )Decrease (-)Decrease (-)Increase ( )Ending balanceEnding balance39
The case of JJ’s Lawn Care Service: expensesOn January 31, JJ’s purchased gasoline for the lawn mower and the truck for 50 cash.COSTSINCOME tBALANCE SHEETACCOUNTCreditDebitAccount #January 31January 31XXXXXXGasoline purchasedAccount ditDateCredit5040
The case of JJ’s Lawn Care Service: Income StatementInvestments by and payments to the owners are not included on the Income Statement.JJ's Lawn Care Services - Income StatementJanuary, 31 2020Amounts in ThousandsSales revenues750 Gasoline expenses(50 )NET INCOME700 41
The case of JJ’s Lawn Care Service: Balance SheetAssets Liabilities Owners’ Equity 21.550 12.850 8.700JJ's Lawn Care ServicesJanuary, 31 2020Amounts in ThousandsASSETSCashLIABILITIES & OWNERS' EQUITY3.825 Notes receivableAccounts receivableNotes payable75 SuppliesAccounts payableTotal Liabilities17.650 Capital stockRetained earningsOwners' EquityTOTAL ASSETS12.850 Salaries payableLandPP&ELiabilities:21.550 TOTAL LIABILITIES & EQUITY12.850 8.000 700 8.700 21.550 42
The case of JJ’s Lawn Care Service: Balance SheetBeginning of periodBalanceSheet(cont.)Ending of periodIncome StatementBalanceSheetStatement of CashFlows43
Financial Statement ArticulationJJ's Lawn Care ServicesJanuary, 31 2020Amounts in ThousandsASSETSCashAccounts receivablePP&ETruckLIABILITIES & OWNERS' EQUITY3.825 75 17.650 Liabilities:Notes payableAccounts payableTotal LiabilitiesCapital stockRetained earningsOwners' EquityTOTAL ASSETS21.550 TOTAL LIABILITIES & EQUITY12.850 12.850 8.000 700 8.700 21.550 JJ's Lawn Care Services - Income StatementJanuary, 31 2020Amounts in ThousandsSales revenues750 Gasoline expenses(50 )NET INCOME700 44
Main ReferencesClass Materials:A. Slides of lesson 1045
The case of JJ's Lawn Care Service: owners' investment On January 1, 2020, Jill Jones and her family invested 8.000 in JJ's Lawn Care Service and received 800 shares of stock Debit Credit Debit Credit Date Account # Account name Debit Credit January 1 XXX Cash 8.000 January 1 XXX Capital stock 8.000 Debit Credit Debit Credit 8.000 8.000
