Paper Example on Balance Sheet: Liab., Assets & Stockholders' Equity

Introduction

The balance sheet can be defined as a financial report that reveals the firm's liabilities, assets, and stockholders' equity at the end of a given time (Gadau, 2016). It is among the five main fundamental financial statements used by business owners and accountants. It also shows the firm's total assets and how they are financed either through debt or equity. A standard business balance sheet is, however, made up of assets, liabilities, and stockholders' equity.

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Assets

Assets are resources with monetary value that are owned and controlled by a business with the anticipation of providing future benefit. They are captured in a firm's balance sheet and created to benefit the company's operations or upsurge its value. They are further divided into two as either current assets or fixed assets.

Current assets refer to all the assets that can be converted into money or used during the operation of the business within one year. They consist of cash and cash equivalents, accounts receivable, short-term investments, inventories, and part of prepaid liabilities that will be settled within 12 months (Gadau, 2016). Some of the paramount liquid assets in a firm's balance sheet are cash and cash equivalencies. Cash equivalencies are readily convertible assets into money, such as treasury bills, cash market holdings, commercial papers, and marketable securities. Cash equivalents are differentiated from other investments by their short-term presence.

Fixed assets refer to assets, which are necessary for the smooth performance of the business operation and for reselling to gain profit. It is only through using these assets that tasks such as production and distribution are carried out to earn income. Examples of fixed assets include buildings, land, machinery, fixtures and furniture, automobiles and trucks, and leasehold improvements.

Liabilities

Liabilities are assertions of creditors counter to the assets of the company. They are arrears owed by the company. They are furthermore divided into current and long-term liabilities. They are organized on the balance sheet in order of how quickly they need to be reimbursed (Gadau, 2016). For instance, the accounts payable will be first on the list as they are mostly repaid within a month. Besides, notes payable are usually payable within three months; that is why they appear second on the balance sheet.

Current liabilities are a firm's short-term financial debts that should be repaid within a typical conversion cycle or 12 months. A conversion cycle also referred to as an operation cycle, is a period it takes a firm to buy inventory and convert it into money from sales (Gadau, 2016). They include taxes, accrued expenses, accounts payable, notes payable to the banks, and any other requirement to creditors' payable within 12 months.

Long-term liabilities, on the other hand, include any arrears that should be settled by the company for more than 12 months from the time the balance sheet is made. This includes startup funding from banks, relatives, and finance companies.

Stockholders' equity

Stockholder's equity refers to the difference between the total liabilities and total assets. Similarly, it is the share capital that is retained in the business adding to the retained profits less the treasury shares. It is the amount that displays how the company has been funded with the aid, for example, with the preferred shares and common shares (Gadau, 2016). It is also known as shareholder's equity, net worth, or share capital. Besides, there are two primary sources of stockholder's equity. The first one is the cash formerly invested in the business and any other investment that is made in the business after the first payment. The second source is the profits that the business has retained through its operations in a given period.

Purpose of the Income Statement and Statement of Comprehensive Income

The income statement can be described as a financial report that aids an individual, business, or company in determining their previous financial performance, project the future performance, and evaluate their ability to generate future finances (Corporate Finance Institute, 2020). It presents the total expenses and revenues incurred and received respectively over a given timeframe. It, therefore, helps in calculating the total revenue of a business or a company to determine whether it has gained profit or loss. It is also used for other purposes, as stipulated below.

A major purpose of the income statement is that it is used by the management since it provides a very clear image of the company's performance throughout the operation period (Corporate Finance Institute, 2020). The income statement of a particular period, functions as an indicator of how the policy put in place by the management of the business, at the opening of the period, has been successful and where there is need for improvement. Thus, it helps management make critical decisions about the operations of a business.

It also serves the financial institutions or the banks that require its submission for the assessment. Once the bank has carefully examined the income statement, it may decide to prolong the limits relished by the business or amend the agreement terms in line with the business-reporting figures. Therefore, lenders rely on the income statement to acquire critical information before making vital decisions that may affect the business.

It is also used by creditors of the business who are primarily short-term to look at the figures reported by the business closely. The income statement displays the creditworthiness of a business and its capability to settle its current debt (Corporate Finance Institute, 2020). In addition, it serves as an indicator for the creditors and suppliers on whether or not they should retain the rapport and the terms of credit with the business.

The statement of comprehensive income, on the other hand, conveys a summary of the business net assets over time. To be precise, it highlights the change in equity in the course of a given period. It is made up of two major items: the income statement and other comprehensive income (OCI). However, not all items are included in the income statement. Thus, the other comprehensive income statements (OCI) captures everything excluded from the income statement.

The primary purpose of the statement of comprehensive income is to offer adequate information on how the business is generating its revenue and the expenses incurred during the process. It is exceptionally exhaustive in highlighting this information. It provides details on the cost of products sold, which are linked to the operative activities as well as other unconnected costs, for instance, taxes. Additionally, the income statement captures other revenue sources, which are not related to the core operations of the business, such as the accumulated interest from the company's investments.

A statement of comprehensive income also acts as an analysis instrument for investors. Most investors are interested in evaluating the financial reports of a business before they agree to invest in it, for example, by buying its shares. It displays the net earnings or the income per share and how it is dispersed across the residual shares. Therefore, the higher the income for each share it presents, the more rewarding it for investors to invest in that company.

Startup Budget

The cost of starting up a business varies depending on the nature of the business, and the industry ventured (Weele, 2005). Besides, the elements required in starting a business may differ. Such factors affect the decisions made by an entrepreneur with the determinants of costs, and startup capital needs reliant on the needs to have the business operating. In this case, setting up a lemonade retail store requires varied capital attributes with the cost of renting space of essence in addition to that involved in the acquisition of the machines used in production, among other costs. Besides, obtaining capital from savings and family and friends, I may rely on other forms of financing such as debt and equity. Their selection, however, depends on factors such as capital needs of the organization, the associated costs of the funding options, and the availability of the funds (Weele, 2005). The options for financing the business may therefore, include internal and external sources of funding (Cassar, 2004). Under internal sources, the funds raised by the entrepreneur(s) may suffice the startup or may require the addition of another source. Therefore, the combination of both internal and external sources of financing may enhance the funding needs of my business. Part of the startup cost needs includes the machine costs for Lemonade production, the full year's rent, the equipment used in the business, decorating, furniture, and fittings expenses, among others, as summarized in the figure below.

Sources of Start-Up Capital

As the owner and the principal operator of the lemonade business, I have the greatest financial and personal stake in this venture. Therefore, it is given that I will utilize my personal funds, for example, savings as a major source of capital. The amount will be essential in starting and building the business from the ground. Although this is taking a financial risk of loss, it will allow me virtually unlimited freedom to utilize and pay back the investment. Therefore, this freedom is applicable to how I use my personal funds and time taken to repay it.

Relatives and friends will also be a significant source of startup capital for my business. Since I will be operating a sole proprietorship that is closely managed and owned, family, and friends who recognize me and have faith in my business are the potential sources of capital. Loans and investments from relatives and friends may carry low interest since they make the investment out of assurance in the individual as well as his vision instead of an aim to make money. Thus, they will be a significant source of funding for my business.

I may also use business or personal card credit to raise the startup capital for my business. Besides, credit card offers funds via cash advances or, in some instances, covering the expenditures. Since my credit card score is appealing, it will be easy to get money to fund my business. It is a significant source of a startup since it does not require any stringent repayment schedule or collateral.

Business grants are also a considerable source of startup capital I can use for my business. They are effective for a sole proprietorship. They are not centered on the creditworthiness of the sole proprietor and may never be repaid. All I have to do is search for organizations and companies that give grants in Canada, present my business idea, and convenience them to offer grants as financial help. Thus, if I present it persuasively and logically, I may secure grants that will be crucial in funding if not full, some aspects of my business.

One-Year Budget-Cash Flow

Projections Rationale

The startup capital for the business is $150,000. Besides, from the aforementioned amount, $100,000 is in form of equity from the proprietor while the remaining $50,000 is in debt form at an interest rate of 2.90% charged per annum. However, the sales income projected for the first month are $25,000. These are expected to grow at a 7% rate monthly. The same rate of growth is identified for inventory with each month registering an increase of 7%. Besides, the product development costs increase with a 7% growth monthly, which reflects the growth in demand for the business products. The other aspect considered of essence is the rent payments. Part of the startup costs included rent calc...