Chapter Five Terms & Ratios
Balance Sheet Items
The balance sheet represents a snapshot of a company's assets. It does not however reflect a complete or
otherwise considered "private" financial position of a firm. It is simply a record of the uncharged expenses to
date. The balance sheet is often open to manipulation. Depending upon what sort of public impression is desired,
financial changes occurring within a company may be disclosed or concealed by massaging the balance sheet.
It is consequently important to read the notes to accounts. Failure to do so could lead to misleading conclusions
about a firm's financial position. Full notes to company accounts can be obtained direct from Companies House.
The balance sheet breaks down as follows: total assets = (fixed assets + current assets) - current liabilities, is
equivalent to or otherwise financed by, long term liabilities + shareholder funds.
Fixed assets are generally those assets that a firm does
not intend to trade, but that it may intend to use for
Fixed Assets producing goods or marketing services.
Total Tangible Assets Includes land, buildings, industrial plants, machinery, fixtures and
fittings and vehicles, etc.
Tangible assets may be revalued incurring large fluctuations in balance
sheet values. If a company comparison is made using balance
sheet values alone, differing asset valuation dates may lead to
misrepresentation. For example, although there may be no material
difference in value of tangible assets between firm #1 and firm #2,
firm #1 that purchased a building and some machinery five years prior
followed by revaluation of these purchases four years later is likely to
have a greater tangible asset value than identical firm #2 that has not
yet revalued the same new purchases.
Intangible Assets Intangible assets are generally goodwill payments made by a firm upon
acquisition of a second firm. That is, payments for assets are made in
excess of the recorded book value at the date of acquisition. Intangible
assets also include the value of a brand or trade name, although this is
subject to serious debate in some accounting circles.
Investments Investments include deposits held in banks, shares of subsidiary
companies held by the parent company and any other long term assets
not described above.
Current assets are generally those assets that are
Current Assets intended for liquidation sooner rather than later.
Stock Stock includes raw materials, bought-in components, work in
progress, finished goods, loose tools and consumables (ie stationery,
petrol and packing materials). The recorded value of stock is most often
dependent upon the policies made by management.
Identical stock owned by separate firms may be valued differently on
the balance sheet. This would depend upon whether "last in first out"
(LIFO) or "first in first out" (FIFO) accounting policy is applied. Unless
two companies implement similar valuation policies, it is difficult to say
which out of the two companies possessing different levels of stock
while generating similar levels of turnover is less or more efficient.
However, if the differences in stock held are great between the two
companies, it is likely that a factor other than the firm's accounting
policy is responsible for this difference. Bear in mind that for many
Chapter Five Terms & Ratios | 47
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