The balance sheet displays the company’s total assets and how the assets are financed, either through debt or equity. It gives an idea of the financial health of an organization. It is like a snapshot of the financial position at a specified time.
The Basics of a Balance Sheet explained from scratch 🧮➕➖➗
In this thread we will talk about -
1. What is Balance Sheet
2. How Balance Sheet is made?
3. Each line items of Balance Sheet
4. Why it is important
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The balance sheet displays the company’s total assets and how the assets are financed, either through debt or equity. It gives an idea of the financial health of an organization. It is like a snapshot of the financial position at a specified time.
1⃣Assets
2⃣Equity
3⃣Liabilities
The balance sheet is based on the fundamental equation: Assets = Equity + Liabilities.
This is also the golden rule of Finance!
Let’s see how actual balance sheet looks like:
Assets are those resources or things which the company owns. They can be divided into current as well as non-current assets or long term assets.
Non-current assets: Assets which cannot be easily converted to cash. Like buildings, machinery.
This line item includes all of the company’s intangible fixed assets, which may or may not be identifiable. Intangible assets include patents, licences, brand, software and goodwill.
The management can easily fool the investors by doing acquisition at high cost & record goodwill in books
1⃣Non current Investments - If holding for more than 1 year
2⃣Current Investments - If holding for less than 1 year
It includes loans and advances which includes loans to related parties or loans to employees, it also covers deposits to govt authorities or security deposits for leases. It also includes advances given to suppliers.
The first line item here is Inventories, which is the closing stock of finished goods, raw materials and work in progress.
It includes the balance of all sales revenue on credit, net of any allowances for doubtful accounts. As an investor we need to carefully check the inventory days & debtor days and compare the same within the industry.
Meaning of Equity
Equity consists of 2 components
1⃣Equity Share Capital
2⃣Other Equity
Equity is also known as the Net Worth of the company
It is the amount raised by the company at its face value. This is the value of funds that shareholders have invested in the company.
Share capital = No. of shares x Face value
We like the companies where equity dilution is less. Equity dilution means raising money by issue of equity shares via QIP, Rights, ESOP.
As for Bank and Financials
Equity=Growth Capital+Safety Capital to abide by the regulatory norms!
1⃣Retained Earnings
2⃣General Reserve
3⃣Securities Premium
Retained earnings are the accumulated profits of the company since inception. Basically net profit or loss in P&L will be transferred to retained earnings.
It is reserve created by the company for safety purpose like any loss due to contingencies like fire or any other loss.
Securities Premium⏬
It is the amount received by the company on issue of shares at price above face value.
In reserves investors needs to be careful if there is any event like writing off the provisions directly from reserves rather than P&L account.
Investors should be very careful in such companies where they are artificially inflating the profits of the company.
These are also classified in 2 parts⏬
🥇Non current liabilities - Dues which are payable after 12 months
🥈Current Liabilities - Dues payable within 12 months
There are 2 types of borrowings⏬
1⃣Secured - It means these loans are against some asset pledged to the bank.
It is one of the most important area which many investors miss while analysing companies.
Lease=Long term debt=Liabilities
ROU=Assets
Thus, it balances!!
Profit & Loss Statement - Increase in EBITDA (no lease rentals) but consequent decrease in initial years in net profit (higher depreciation & interest cost).
Balance Sheet - Increase in Assets & Liabilities
They have shown P&L as per the IND AS 116 adjustments⏬⏬
These are the amount the company has provided for future obligations like gratuity payable to employees or leave encashment for employees, warranty claims that can arise in future These are also bifurcated between current & non current
First understand what is the need of deferred tax. So as we know company prepares book of accounts as per Companies Act whereas they need to pay tax as per Income Tax Act, in both these acts there are some differences which leads to DTA or DTL.
At the end of the day, taxes are always paid as per the Income Tax Act :)
Here companies are required to show trade payables in 2 parts
1⃣Dues to MSME
2⃣Dues to others
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I'll begin with the ancient history ... and it goes way back. Because modern humans - and before that, the ancestors of humans - almost certainly originated in Ethiopia. 🇪🇹 (sub-thread):
The famous \u201cLucy\u201d, an early ancestor of modern humans (Australopithecus) that lived 3.2 million years ago, and was discovered in 1974 in Ethiopia, displayed in the national museum in Addis Ababa \U0001f1ea\U0001f1f9 pic.twitter.com/N3oWqk1SW2
— Patrick Chovanec (@prchovanec) November 9, 2018
The first likely historical reference to Ethiopia is ancient Egyptian records of trade expeditions to the "Land of Punt" in search of gold, ebony, ivory, incense, and wild animals, starting in c 2500 BC 🇪🇹
Ethiopians themselves believe that the Queen of Sheba, who visited Israel's King Solomon in the Bible (c 950 BC), came from Ethiopia (not Yemen, as others believe). Here she is meeting Solomon in a stain-glassed window in Addis Ababa's Holy Trinity Church. 🇪🇹
References to the Queen of Sheba are everywhere in Ethiopia. The national airline's frequent flier miles are even called "ShebaMiles". 🇪🇹