Believe it or not, there are certain things that companies can and do leave off of their balance sheets, or statements of financial position. These things are assets in which the company has control over or helps the owner to manage, but they do not have ownership of. Some companies do include these assets on their statement of financial position, but many of them utilize off balance sheet financing for these assets. Generally, this is a perfectly acceptable practice. However, during the whole Enron debacle, this practice became front and center. The problem during that whole thing was that they had set up faulty and improper off balance sheet units.

Needless to say, if a company is going to utilize off balance sheet financing for some of their assets, they had better be careful and very sure that they are reporting everything correctly. One wrong move and they can be part of a huge scandal like Enron turned out to be. So, it is best for the company to fully understand if they are just overseers of an asset for a client or if they actually own the asset themselves. Sometimes, difficult as it may seen, it can be hard to understand just who owns a certain asset based on the legal standards that are in place.

For most companies there are certain times when off balance sheet financing can be used:

Research and development – Multiple companies can share the expenses for research and development, thus allowing it to be considered as off the balance sheet.
Joint ventures – This is when two or more companies undertake a project together. Each one is usually financially responsible for certain aspects of the venture, so it is not considered to be an asset to one particular company.
Operating lease – This is a lease where the company is only required to disclose the expense in regards to using the property or the equipment furnished instead of everything involved in major projects that they undertake.

Companies who use off balance sheet financing really have to be careful how they use it. Since the Enron scandal, these things are looked at more closely and any little red flag will set someone off who is looking at your balance sheets. As long as the separate entity is on the up and up, however, the company who uses off balance sheet financing should be in the clear and will benefit from this type of financing.

On September 7, 2011 By Richard Wilson

Practice Test

Balance Sheet Projection

The following video is borrowed from our BusinessTraining.com platform and was originally recorded for our financial modeling training program. In the following video, we explain how you can project the balance sheet.

Video Transcript/Summary: The strategies and tips provided within this video module include:

Coming soon.

I hope that this has been a useful lesson on balance sheet projection.

Your friends here at https://investmentcertifications.com

On September 7, 2011 By Richard Wilson

Practice Test

Financial Balance Sheets

The following video is borrowed from our BusinessTraining.com platform and was originally recorded for our financial modeling training program. In the following video, we cover the balance sheet by walking through an example step-by-step.

Video Transcript/Summary: The strategies and tips provided within this video module include:

If all the assets in a company were liquidated and the proceeds used to pay off all of the liabilities, what is left is the equity proceeds. Therefore, Assets = Liabilities + Equity.
Current Assets are short term assets with the first line item being cash and cash equivalents with Investments coming after this on Ciscos Balance Sheet. Accounts receivable refers to the money owed to Cisco. Inventory is the equipment of the company. Deferred tax assets are essentially a tax credit that come in as an asset. Other current assets vary from company to company and for Cisco, they can be found in the footnotes of annual/interim reports.
Long-term Assets include Property and Equipment Net. The “net” means that depreciation has been accounted for. Goodwill in todays M&A structures are not treated in similar fashion today as they were previously, whereby the goodwill could be treated as an expense on the Balance Sheet and therefore a tax benefit was recognised. Intangible Assets vary but in Ciscos case could be the brand for instance. Adding the Current and other Non-Current Assets gives the Total Assets.
Current Liabilities are short term and includes short-term debt, which is money that generally needs to be paid out within 3 months of being borrowed. The Payables figure is the amount owed to suppliers. Income taxes payable is the figured owed to the government in the way of taxes. Accrued compensation is a liability in that it will at some stage need to be paid out to employees for leave etc. Deferred revenue refers to money received but for which the service has not delivered/provided. Adding the line items, you get the Total Liabilities figure.
Non current liabilities are longer term, as is evident in the first line item, long-term debt. Adding up the non-current and current liabilities gives the Total Liabilities figure.
Once the Total Equity figure is now included, we should be in a position to surmise that the Total Assets figure equals the Total Liabilities + Equity figure.
Total Current Assets – Total Current Liabilities = Working Capital, which is a measure that tells you how much the company has to cover its working capital needs (i.e. the day-to-day needs of the business).

I hope that this was a practical tutorial of financial balance sheets.

Your friends here at https://investmentcertifications.com

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