3.4 Final Accounts
The use of profit and loss accounts
They can be used to measure and compare the performance of a business over time or with other firms - and ratios can be used to help with this form of analysis
The actual profit data can be compared with the expected profit levels of the business.
Bankers and creditors of the business will need the information to help them decide whether to lend money to the business
Potential investors may assess the value of investing in a business from the level of profits being made. However, when doing this it is essetial to try to differentiate between "low quality" and "high quality'' profit
low-quality profit : one-off profit that cannot easily be repeated or sustained
high-quality profit :: profit that can be repeated and sustained
The balance sheet
- The balance sheet records the net wealth (this 'belongs' to shareholders) or shareholders' equity of a business at one moment in time.
- The aim of most businesses is to increase the shareholders' equity by raising the value of the business's assets more than any increase in the value of liabilities.
Definition
Balance sheet: an accounting statement that records the values of a business's assets, liabilities and shareholders' equity at one point in time
shareholders' equity : total value of assets less total value of liabilities
share capital : the total value of capital rised from shareholders by the issue of shares
Shareholders' equity comes from two main sources:
- The first and original source was the capital originally invested in the company through the purchase of shares. This is called share capital
- The second source is the retained earnings of the company accumulated over time through its operations. These are sometimes referred to as reserves - which is rather misleading as they aren't reserves of cash
Different types of intangible assets
Marketing-related intangible assets - use to promote or market roducts or services. Trademarks, logos or trade names ae words, phrases or symbols that distinguish or identify a company or its products
Customer-related intangible assets - result from business relationships with outside parties. They include lists of regular and reliable customers and contracts gained through long term customer relationships.
Artistic-related intangible assets - give ownership rights to plays, literary works, musical works, pictures, photographs, and video and audiovisual material. A copyright protecting these ownership rights can be granted for the life of the creator plus 70 years.
Contract-related intangible assets - come from the value of rights arising from contractual arrangements, such as franchises, licensing agreements, construction permits, broadcasting rights, and service or supply contracts
Technology-related intangible assets - arise from patents taken out on innovations or technological advances. A patent gives its holder the exclusive right to use, manufacture and sell a product or process for a period of 20 years without any interfrence or infrigement by others.
Goodwill - arise when buying out another company. Goodwill is the value paid for the company in excess of the fair market value of the net assets acquired.
Example: suppose that you're paying $2 000 000 for a company with net assets worth $1 600 000. Goodwil in acquistion is equal to $400 000 = $2 000 000 - $1 600 000