20 Ideal Essentials – Preparing Financial Statements when Selling
A Balance Sheet is supposed to balance your Assets to Liabilities and Equity. Therefore like any simple equation, one side must equal the other.
Relative to preparing financial statements when selling your business to investors or buyers, the equation Assets = Liabilities + Equity a major report which gives investors an idea regarding the health of the company.
All Balance Sheets will calculate your Current Assets + Non-Current Assets, which should equal your Current Liabilities + Non-Current Liabilities, Share Capital + Retained Earnings.
As I mentioned before, preparing financial statements when selling to investors or buyers, it is imperative that a balance sheet it readily available for disclosure and produced by an easy to use cloud solution, accountant or CPA. Also, if this is not what you are interested in, and it was Cashflow, then follow the link to my next post.
Balance Sheet key line items for calculating
ASSETS
CURRENT ASSETS:
Your current assests are usually assets that either generate cash or are expected to generate cash within a year. Below are a few line items which are most times found in your Current assets accounts.
Cash and Cash Equivalents
Cash or items that act like cash (eg, short term money market funds) that a business holds.
Accounts Receivable
Customers who have purchased on credit – accounts to be collected.
Inventory
Goods either purchased or produced for sale to customers.
Prepaid Expenses
Expenses that have been incurred where the service has not as yet been “earned”/delivered. Typical prepaid expenses include insurance, rent and utilities.
Deferred Income Tax Asset
A timing difference due to the difference between accounting income and taxable income. Difference will reverse in the next reporting period.
TOTAL CURRENT ASSETS
The total current assets would then obviously be all the items mentioned above added up to give that total.
Non-Current Assets:
Your non-current assets have to do with mainly investing activities or assets which have been purchased with the intention to hold onto them for a number of years and may produce yeilds or gains some time beyond a year. Below are some examples of what those line items are.
Property Plant and Equipment
Physical assets used to generate income over a period of time greater than 12 months. Include things such as buildings, furniture, computers, vehicles, manufacturing equipment.
Goodwill
The premium paid on the acquisition of another business.
Intangible Assets
Long term assets of the business that have no physical substance. Examples include licences, patents and trademarks.
Total Non-Current Assets
This is the same as for the current assets section above where all the items in this non-current assets section will be added to produce a total.
TOTAL ASSETS
In this line item you take your total current assets and your non-current assets, add them and voila, there is your total assets.
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Balance Sheet key line items for calculating
LIABILITIES
CURRENT LIABILITIES:
Your current liabilities are obligations based on past events or transactions which will result in an outflow of cash or some economic benefit to the oblidged party.
Accounts Payable
Supplier invoices that relate to the current reporting period but that have not yet been paid.
Accrued Liabilities
Liabilities that are related to the current reporting period but have not been paid. Typical accrued liabilities include compensation, audit and legal fees.
Unearned revenue
Revenues that have been collected from customers but have not yet been earned by the company (eg, performance of service has not yet occurred, or product has not yet been delivered).
Income taxes payable
Corporate taxes for the period that must be remitted to government.
Current Long-Term Debt
The amount of any loan(s) repayments due within the next 12 month period.
Current Capital Lease Obligation
The amount owing over the next 12 months for capital lease payments.
TOTAL CURRENT LIABILITIES
Here you add all the line items above and you have your total current liabilities. Simple enough.
Non-Current Liabilities:
These long term liabilities are usually obligations which are beyond a 12 month period but may from time to time be used for obligations which fall within a 12 month period depending on the intent of the obligation when it was effected.
Long-Term Debt
Borrowing for business – one or multiple loans where term is longer than 12 months.
Capital Lease Obligation
Capital leases are leases that are related to specific assets. They act the same as a loan – except instead of borrowing money to purchase the item outright, the company leases the asset – but all the benefits of ownership are substantially transferred through the lease.
Contingencies
A potential future liability that the company can reasonably estimate (eg, from a pending lawsuit)
TOTAL NON-CURRENT LIABILITIES
In this line item you take your non-current liaibilities, add them and as easy as that, you have your total non-current liabilities.
Balance Sheet key line items for calculating
SHAREHOLDER’S EQUITY
SHAREHOLDER'S EQUITY:
Shareholder’s equity is what you, your partners, famil and friends would have as a vested monetary interest in the company directly relative to ownership.
Common Stock
Shares held by investors in the company. These shares allow for voting rights and participation in profits.
Preferred Stock
Shares purchased by investors that have fixed dividends that have a priority over common shareholders.
Retained Earnings
The accumulated profits and losses of the business since inception. If the company has more losses than profit, then this would be stated as “retained deficit”.
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY
Finally this is the addition of your total current liabilities, non-current liabilities and shareholder’s equity which gives your total liabilities and shareholders equity. This should balance with your total assets result.
In Closing
As you can see in the fairly short but semi-detailed iterations above, preparing financial statements when selling your business is very important when it comes to understanding your balance sheet and its components.
I hope this has been some help to you and it has been useful in some way. Be sure to pay attention to each line item and understand the correlations involved with each segment.
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