The Balance Sheet : Inventory
September 11, 2007
If the business you’re contemplating buying is a service business, you won’t have inventory to worry about, but if you’re thinking of buying a business that manufactures and/or distributes products, you’ll be faced with the problem of valuing and dealing with the seller’s inventory.
On December 31, 2003, Houston Sash & Door had $203,841 in its inventory account. Does this mean that the inventory is worth $203,841, or that it could be sold for $203,841? Neither. Since the balance sheet records only what was paid for assets, it provides us with hardly a clue about what inventory is worth or what it can be sold for, if at all! Houston’s inventory may be worth far more than $203,841, far less, or zero. How is this possible? Very often, inventory decreases in value as it sits on the shelves.
The Balance Sheet : Notes Receivable
September 10, 2007
Houston Sash & Door’s balance sheet has two entries for notes receivable. One represents an amount creditors incurred in the normal course of business with Houston Sash & Door. The other, Note Receivable-Officer, represents a debt Houston owes the business. This is the one to which you should give special attention.
Is there an enforceable promissory note backing up the debt? Since Houston was dealing with a company he owns himself, there may not be. Since the receivable appears as a current asset, it should be payable within a year. Is it? Most important, how are you going to deal with his personal debt to the business when you buy the business? Will you require that it be paid at the closing? Will you insist on withholding part of the purchase price, in order to assure that the debt is paid when it comes due? Whatever you do, don’t forget about this important item.
Pay close attention to the other notes receivable entry. Just because a note is included as a current asset doesn’t mean it can be collected within a year. A note receivable may have started out in life as an account receivable. When the debtor couldn’t pay, the creditor did the next best thing: The creditor had the debtor sign a short-term promissory note. But since the debtor couldn’t pay the debt when it was a receivable, there’s no assurance the debtor will be able to pay the promissory note, either.
Gauge Your Awareness
September 9, 2007
Howard Book (hbwork@netsurf.net) is an associate professor in the department of psychiatry at the University of Toronto and an organizational consultant.
The Balance Sheet : Accounts Receivable
September 7, 2007
On December 31, 2003, Houston Sash & Door was owed $230,962 by its customers (net of reserve). The company generated these receivables by making sales on credit. As soon as a sale was made, a receivable was entered in the company’s accounts receivable ledger. The $230,962 figure represents the total amount of credit sales that hadn’t yet been paid on December 31, 2003. Does this mean that within the coming year the business can expect to receive exactly $230,962 from its customers? Not quite. Every business has a certain percentage of accounts receivable that go bad.
Seek Frank Feedback
September 6, 2007
Andrea Jung is the chair and CEO of Avon Products, which is based in New York.
The Balance Sheet : Cash
September 3, 2007
Cash is the first item that usually appears under current assets, which are, generally speaking, the most liquid assets, that is, those assets most easily converted into cash. The current assets part of the balance sheet lists the assets in descending order of liquidity. Since there’s nothing more easily converted into cash then cash itself, it’s listed first. As a rule of thumb, accountants will place an asset in the current assets category if the asset is expected to be reduced to cash during the business’s operating cycle, which is the time it takes for cash to go through the business and come back as cash, as follows: starting with cash, to the purchase of raw materials, to the manufacture of finished goods, to the sale of the goods (i.e., the inventory), to the conversion of inventory to accounts receivable, and the conversion of accounts receivable back to cash when the accounts are paid.
Train the Gifted
September 3, 2007
Elkhonon Goldberg (egneurocog @aol.com) is a clinical professor of neurology at New York University School of Medicine and the director of the Institute of Neuropsychology and Cognitive Performance in New York.
Analyzing the Financial Statements: The Balance Sheet
September 2, 2007
You should know what a balance sheet is and what it isn’t. Every balance sheet ever prepared for any business is perfectly balanced! This is not the result of accountants being mathematical wizards. Rather, it’s because a balance sheet represents an equation, and the left side of an equation always equals the right side.
The equation is:
Assets = liabilities + net worth
Stated differently:
Assets - liabilities = net worth
Not only is every balance sheet an equation, it’s an equation as of a given moment in time. Let’s take a look at the balance sheet in Table 4.1. It reveals the following:
Assets ($822,658) = liabilities ($131,243) + net worth ($691,415)
Analyzing the Financial Statements: How reliable are the target’s financials?
September 1, 2007
The heart and soul of any business can be found in its financial statements: the balance sheet and the income statement, which is also referred to as the statement of profit and loss (P & L), or the statement of operations. Nobody would be foolish enough to buy a business without examining its financial statements (the books) beforehand. The trick is to understand what you’re looking at. Scan the balance sheet and income statement of Houston Sash & Door, Inc. for a few moments to get a feel for them; we’ll cover most of the entries in depth later.
