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 Firm5100Appendix A- The Financial Statements of a Firm