Analysis of the Operation and Financial Condition of the Enterprise

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Analysis of the Operation and Financial Condition of the EnterpriseReserve capital is disclosed in the enterprise with the purpose of providing forcontingent losses. The amount of this capital shows what share of property will be usedto cover for the liabilities of an enterprise in case of its dissolution.In the balance sheets of some enterprises different other purpose funds may be created.Special regulation must be developed for the use of these funds.Retained earnings may be distinguished in the balance sheet as a separate item orcredited to the net profit item. In any case retained earnings is the share of profit that was notpaid out in dividends to the owners, but has been used for the financing of the enterprisebusiness activities by investing it for the share capital, securities etc. needs.ItemAssetsLong-terminvestmentsWorking cap.LiabilitiesEquitycapitalDebt capitalTable 3.2 Possible order of balance sheet analysisQuestions to be consideredWhat is the total amount of assets?What are the changes in the total amounts of assets compared to thepreceding period?What is the reason for changes in total assets?What is the structure of assets – the long-term investments and theshort-term assets?Have any changes taken place in the structure of the assets compared tothe preceding period?What is the reason for changes in the asset structure?What is the composition of long-term investments? (intangible andtangible assets)?Are there any long-term assets unused or inefficiently used in business(for example, obsolete or worn out fixed assets)?Are there any changes in the structure of long-term investmentscompared to the preceding period?What is the content and structure of current assets?Are all current assets liquid assets?What are the changes in the structure and amount of current assetscompared to the preceding period?What is the structure of liabilities – the relation between equity capitaland debt capital?Are there any changes in the structure of liabilities compared to thepreceding period?What has changed? What is the reason for these changes?Are there any changes in the structure and amount of equity capitalcompared to the previous period? What is the reason for these changes?What is the debt capital structure – long-term and short-term liabilities?Are there any changes in the long-term and the short-term debt capital?What has changed? What is the reason for these changes?In enterprise business analysis various balance sheet layouts are used – the vertical and thehorizontal layout, for example. The layouts are easily convertible between each other.54
Analysis of the Operation and Financial Condition of the EnterpriseHorizontal balance sheet layout equation:Long-term investments + Current Assets = Capital + Long-term Debts + Short-term DebtsVertical balance sheet layout equation:Long-term investments + Current Assets – Short-term Debts – Long-term liabilities 2 =CapitalLong-term Investments + Current Assets – Short-term Debts = Capital + Long-term DebtsCurrent Assets – Short-term Liabilities = Net Current Assets (Working Capital)Example Preparation of enterprise balance sheet according to vertical and horizontallayoutsThe following enterprise data are available as of December 31 (in thousands of CU)Position itemAmount(thous. CU)Plant and machinery 25Trade accounts payable 18Bank overdraft 26Stock of goods 45Buildings and constructions 72Long-term bank loan 51Trade accounts receivable 48Equity 117,5Cash in till 1,5Transport vehicles 15Furniture and computers 9Profit for the year reported 3 000Solution Balance sheet according to the vertical layout:2 Long-term investments + Current Assets – Short-term Liabilities – Long-term Liabilities = Net Assets55
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Analysis of the Operation and Financial Condition of the Enterprise

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