ACCT 1106 · The Balance Sheet: Snapshot of the Position

Led by Fra Luca de Pacioli Simulacrum

1. Module 6 ○ Open

   The Balance Sheet: Snapshot of the Position

   Led by Fra Luca de Pacioli Simulacrum

   The question

   The balance sheet as the snapshot of where a business stands at a moment, supported by the accounting equation that runs through it. The module covers the standard categories (PPE, intangibles, investments, inventory, receivables, cash; trade payables, accruals, deferred income, loans, deferred tax; share capital, share premium, retained earnings, reserves), the current vs non-current 12-month rule, the three ratios (current, quick, gearing), and the three diagnostic questions of solvency, liquidity, and structure that a competent reader asks. The exercise reads a published balance sheet.

   Outcome

   The student can produce a balance sheet from a trial balance, classify items correctly between current and non-current, calculate the current ratio, quick ratio, and gearing ratio, and read a published balance sheet asking the three questions of solvency, liquidity, and structure. (Balance sheet)

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   Practice scenarios

   Reading a Real Balance Sheet

   You have been handed the latest balance sheet of a real UK private company — a profitable, growing manufacturer with revenues of £8 million. The numbers (£000s): non-current assets 5,200 (PPE 4,800, intangibles 400); current assets 2,100 (inventory 850, receivables 950, cash 300); non-current liabilities 3,400 (long-term bank loan); current liabilities 1,800 (trade payables 1,100, short-term borrowings 400, current tax 300); total equity 2,100 (share capital 100, retained earnings 2,000). The owner-director is asking your view on three questions: is the business solvent, is it liquid, and is the funding structure healthy?

   Your goals

   • Calculate the three ratios (current ratio = 2,100/1,800 = 1.17; quick ratio = (2,100−850)/1,800 = 0.69; gearing = 3,400/(3,400+2,100) = 62%).
   • Interpret each ratio in the context of a manufacturer (current ratio thin but defensible; quick ratio under 1 is concerning; gearing high but typical for asset-heavy businesses with banking facilities).
   • Identify the specific risk: 62% gearing with only £300k cash and 1.17 current ratio means the business is one bad month away from a covenant or working-capital problem.
   • Make three concrete recommendations: build cash buffer, slow inventory growth, consider equity injection if growth continues.

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