The 30 Day MBA by Colin Barrow Read Free Book Online Page A

retained)
8,700
TOTAL
33,608

33,608
    Working capital
    You will also have noticed in this example that the assets and liabilities have been jumbled together in the middle to net off the current assets and current liabilities and so end up with a figure for the working capital. ‘Current’ in accounting means within the trading cycle, usually taken to be one year. Stock will be used up and debtors will pay up within the year, and overdraft being repayable on demand also appears as a short-term liability.
    There are a number of other items not shown in the working capital section of the example balance sheet that should appear, such as liability for tax and VAT that have not yet been paid, and these should appear as current liabilities.
    Intangible fixed assets
    There are a number of seemingly invisible items that nevertheless have been acquired for a measurable money cost and so have to be accounted for:
Goodwill: This is where the price paid for an asset is above its fair market price. This is fairly common in the case of acquisitions where competition for a company can push prices higher.
Intellectual property such as patents, copyright, designs and logos.
    These items too are amortized over their working life. So, for example, if a patent is considered to have a 10-year life and cost £1 million to acquire, it would be written down in the accounts by $/£/€100,000 a year.
    Accounting for stock
    Deciding on the stock figure to put into a balance sheet is a tricky calculation. Theoretically it is simple; after all, you know what you paid for it. The rule that stock should be entered in the balance sheet at cost or market-price, whichever is the lower, is also not too difficult to follow. Butin the real world a business keeps on buying in stock so it has product to sell, and the cost can vary every time a purchase is made.
    Take the example of a business selling a breakfast cereal. Four pallets of cereal are bought in from various suppliers at prices of $/£/€1,000, $/£/€1,020, $/£/€1,040 and $/£/€1,060 respectively, a total of $/£/€4,120. At the end of the period three pallets have been sold, so logically the cost of goods sold in the profit and loss account will show a figure of $/£/€3,060 ($/£/€1,000 + $/£/€1,020 + $/£/€1,040). The last pallet costing $/£/€1,060 will be the figure to put into the balance sheet, thus ensuring that all $/£/€4,120 of total costs are accounted for.
    This method of dealing with stock is known as FIFO (first in first out), for obvious reasons. There are two other popular costing methods that have their own merits. LIFO (last in first out) is based on the argument that if you are staying in business you will have to keep on replacing stock at the latest (higher) price, so you might just as well get used to that sooner by accounting for it in your profit and loss account. In this case the cost of goods sold would be $/£/€3,120 ($/£/€1,060 + $/£/€1,040 + $/£/€1,020), rather than the $/£/€3,060 that FIFO produces.
    The third popular costing method is the average cost method, which does what it says on the box. In the above example this would produce a cost midway between those obtained by the other two methods; in this example $/£/€3,090.
    All these methods have their merits, but FIFO usually wins the argument as it accommodates the realities that prices rise steadily and goods movein and out of a business in the order in which they are bought. It would be a very badly run grocer’s shop that sold its last delivery of cereal before clearing out its existing stocks.
    Methods of depreciation
    The depreciation is how we show the asset being ‘consumed’ over its working life. It is simply a bookkeeping record to allow us to allocate some of the cost of an asset to the appropriate time period. The time period will be determined by such factors