Structure Of Financial Statement Of Limited Liability Companies
It is important for anyone who cares to understand the bedrock of financial statements of limited liability companies so as to help us in assessing any borrowing propositions. The statement of accounts usually gives us important information and helps us to established facts quickly when there are variations in the balance sheet figure.
A balance sheet shows a static position at a historic data and acts as an aid to consideration of loan proposition. It is used on comparative basis of figures of different years in operation of a company. In ideal situation at least three years balance sheet should be made available to a banker to enable him take a decision. A cursory look at the essential element of a balance sheet, in essence.
Capital base, liquidity and profitability, a banker will have enough evidence to support his customer’s requirement. Delay in the publication of audited accounts is often a sign of poor management and puts you on the question whether a customer has thing to hide. Below is a typical balance sheet of DCG Limited as the time of check which is usually on the last day of the year.
Assets To Consider In The Financial Statement
Fixed assets – These are assets acquired for use and not for sale. They are acquired or constructed with the intention of continual use in the business. Examples include plant and machinery motor vehicles, land, buildings, equipment, furniture and fittings. There are three main classes of fixed assets;
- Tangible assets – Tangible assets are those which have physical existence, for example, land buildings, plant and machinery and other enumerated above.
- In tangible Assets – These are assets which do not have physical existence, for example, Goodwill, patents, Copyrights, Trade Marks etc.
- Investments – Investments in other business intended to be held on long term basis are classified as fixed assets.
The most important items include land and building. They are permanent in nature and immovable. They are mostly accepted by banks as security when offering loans to its customers. When other assets like machinery or vehicles are offered as security to a bank for loan proposition, the bank officials should make a trip to the company’s premises to ascertain the conditions of the equipment. In most cases, banks do not accept vehicles are collateral.
Investments – These are investments made in subsidiaries, quoted and unquoted companies. when the figures in investment items are high in relation to total assets, the lending banker should look closer to investigate the items, possibly call for the balance sheet of the company involved, Unquoted investments are difficult to dispose of as well as difficult to evaluate.
Stock – These are inventory purchased for the production of goods and services. It may consist of raw materials, work in progress goods and finished goods. The stock held by a company depends on the type of trade. The stock turnover is usually important to a lending banker because he would be able to determine the number of days such stock is held.
Stock management is an important area of any business, because over stocking will require additional funding which will help to reduce the profit margin of the company and this would also tie up a disproportionate amount of working capital.
Debtors – These are people who have bought goods and services on credit and promise to repay within a specific date. The makeup of debtors should be called for when making lending discussion. These make up include the amount the ages of outstanding debts. From the list of debtors, it will be possible to assess the company’s success or otherwise its credit controls. If much is not taken in debtors, it could have a repercussion if substantial bad debts are incurred.
Cash At Hand And Banks – This is actual physical cash that the company has at hand or banks. This is to enable the company meet up with its immediate commitment for a capital acquisition, tax/dividend payment.
Liabilities – Current liabilities are liabilities of a business that are due for payment within a period of one year from the balance sheet date. Creditors are those people the company is deferring their payment e.g. suppliers, salary and wages, taxes and dividend. A lender should assess the general level of credit being taken but a more better assessment can be obtained by utilising the following formula
= Creditors x 365/Purchases = No of days Credit taken
Any deterioration of the period when compared with past balance statements will need further inquiry. A list of creditors outstanding could be sought showing by name, amount and due dates. A large spread of creditors will make the business less vulnerable to outside pressure. The banker should also inquire further to see if there are creditor who are pressing for their money.
It is important to note that taking of credit is the settle bills as at when due. The extent of credit will vary from trade to trade and also will depend on the trading of the particular company concerned.
Bank Borrowing – This is the amount already borrowed from another bank, which is shown on the balance sheet. The lender should ask for details of the previous borrowing. This will enable the lender to compare the existing borrowing plus the requested funds to the liquidity of the company to ascertain if it could be meeting up with interest payment.
Taxes – This is also an indication of profitability to the company, but a cash drain when paid to the government. Taxes are paid usually within one year from the date it was assessed by the Board of Internal Revenue.
Long term Liabilities – These are long term debt resulting from the borrowed fund used in financing assets, equipment’s and human resource development. A lending banker must consider the level of existing outside finance and it will be necessary to obtain full details of any loans (secured or unsecured) mortgages and debenture outstanding. Attention should be paid to the term of repayment, interest rate payable and what security has been out to other creditors.
Capital And Reserve
Authorised Capital – This is the amount of capital that a company is authorized issue, and within the limits of the amount could capitalize its reserves by bonus shares. Many companies usually want to start with a very small amount of authorized capital.
Issue Capital – This is the actual share issued out in monetary terms. It is issued to the members of the company and in most cases denominated in 50 kobo per share. The issued capital, plus reserves profit and loss less intangibles provides the surplus resources of the business. The issue capital figure is important to a lender particularly when a company has adopted article 79 of table of the companies ACT which limits directors borrowing powers to the amount of the issued share capital of a company, unless the article is expressly excluded by or incompatible with special articles of association registered by the company.
Reserves and Profit and Loss balance – It is the leftover of the previous year’s income that build up as years go by. It is an indication of prudent management. Capital reserve cannot be distributed as dividend but all other reserves could be used to pay dividend. Also other reserves could be retransferred to the appropriation account and distributed.
Profit And Loss Account
Turnover – This is represents the total sales figure less discounts to returns. it is from this amount that expenses are made.
Gross Profit – This is the different between sales cost of goods sold. It represents the margin of profit to be used in paying for other overheads, depreciation, interest and bad debts.
Net profit before tax – This is the balance left after all other experience has been taken care of. The taxes will be deducted from this amount and the balance is called net profit after tax which is the bottom line for the shareholders of the company. The shareholders will now decided either to share it as dividend or retain the profit in the business.
Finally, we have discussed the component items in a historic balance sheet, and profit and loss of a standard company. These items may not be very important to a lending banker but it is the ability of the banker to recognize items within the mass of figure which call for closer examinations. Comparison with previous year’s figure provides the best means of understanding this.
Various banks have their standard format of balance sheet preparation which provides at a glance comparison over 3 to 5 years period of both individual items and ratios. Any explanation could be sought from the directors of the business that have exceptional items which cannot be explained by closer examination of the figure.