Economics Part A

Appendix A- The Financial Statements of a Firm

A firm is an inclusive name for all business structures, including companies, partnerships, proprietorships, banks, etc. A firm prepares a report called financial statements once each year.

This report has two main elements:

• A balance sheet

• An income statement

Each of these elements has two parts and a bottom line, as presented in the following table. The bottom line is the difference between part A and part B.

Table 7.4

Components of the Balance Sheet and Income Statement

 Balance Sheet Income Statement Part A Total Assets Total Revenues Part B Total Liabilities Total Expenses Bottom Line (Total Assets) - (Total Liabilities) (Total Revenues) - (Total Expenses)

The Balance Sheet

The balance sheet presents a picture of the firm’s assets and the firm’s liabilities, on a given date, usually the last day of the year. The balance sheet is presented in two columns, as shown in Table 7.5.

The left column lists all the assets of the firm, and the right column lists all its liabilities. The right column also presents the difference between assets and liabilities using the following terms:

1. If the difference is positive (assets are greater than liabilities) – “shareholders’ equity”
2. If the difference is negative (liabilities are greater than assets) – “deficit”.

Adding the difference to the right column causes the total of the left column to be equal to the total of the right column. The term “balance sheet” is derived from this fact (meaning that a balance exists between the two columns).

Table 7.5

The Balance Sheet of the Furnishing Company on 31.12.01(figures are in dollars)

 Assets Liabilities Buildings                                     100 Bank loans                                 250 Equipment                                   200 Suppliers                                    100 Customer credit                           100 Total liabilities                           350 Inventory                                     100 Cash                                              50 Equity capital                             200 Total                                           550 Total                                          55

Summary Balance Sheet

When the asset and liability items are not listed, or are only partially listed, the report is called a “Summary Balance Sheet”, as shown in Table 7.6.

Table 7.6

Summary Balance Sheet of the Furnishing Company on December 31, 2008 (figures are in dollars)

 Assets Liabilities Assets                                          550 Liabilities                                   350 Equity Capital                            200 Total                                           550 Total                                          550

Although the right column was called “Liabilities”, its full title should be “Liabilities + Equity”, as follows:

 Assets Liabilities + Equity

Appendix A- The Financial Statements of a Firm580