Current liabilities noncurrent (long-term) liabilities

(to be paid within one year) (coming due in more than one year)

accounts payable (amounts owned to trade creditors) bonds; mortgages; notes

taxes payable (to government)

interest or dividends payable (to investors)

wages payable (to workers)

LEVERAGING THE ASSETS

Financial leverage is usually measured by the ratio of long-term debt to total long-term capital. Another way to express leverage is in terms of the company's debt-equity ratio. Notice that both these measures make use of book, i.e. accounting, values rather than market values.

The market value of a company finally determines whether debtholders get their money back, so you would expect analysts to look at the face amount of the debt as a proportion of the total market value of the debt and equity. The main reason they don't do this is that market values are not readily available. Does it matter much? Perhaps not; after all. the market value includes the value of intangible assets generated by research and development, advertising, staff training and so on. These assets are not readily saleable and, if the company falls on hard times, the value of these assets may fall to zero. For some purposes, it may be just as well to follow the accountant and to ignore these intangible assets entirely. Notice also that this measure of leverage takes account only of long-term debt obligations. Managers sometimes also define debt to include all liabilities other than equity....

Reporting results

Assets and liabilities, profits or losses are listed in financial statements. The two main types of financial statements are the balance sheet and the income statement {profit and loss account).

The balance sheet lists a firm's assets, liabilities and owners' equity at a point of time.

Firms in a good situation are said to have a strong balance sheet and those that are not, a weak one.

Things that are not shown in the balance sheet but in a footnote, for example, are off-balance sheet.

A company's balance sheet may include provisions for potential losses, such as bad debts, debts that may never be paid. If it looks almost certain that a debt will not be paid, it is considered a write-off and written off.

Provisions are liabilities, the amount of which cannot be established precisely, or the occurrence of which is uncertain. Provisions should be distinguished from reserves, which are amounts set aside under equity for future use with respect to obligations which may arise from probable or possible events.

A company's financial performance for a period is its results, which it reports in the form of a profit and loss account, indicating, unsurprisingly, whether it has made a profit or a loss. The equivalent document in the US is the income statement. A pre-tax profit or loss is one calculated before tax is taken into account.

The accuracy of accounts such as the balance sheet and the profit and loss account is checked and supposedly guaranteed by auditors, outside accountants who specialize in this.

When a company's accounts are presented in a way that makes performance look better than it really is, the company may be accused of window dressing or creative accounting.

The bottom line is an informal way of talking about the results of a company: the so-called bottom line of the profit and loss account. The bottom line also means the final result or the most important aspect of something.

Date: 2015-12-24; view: 744