Download e-book for kindle: Between the Lines of the Balance Sheet. The Plain Man's by Michael Greener

By Michael Greener

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It would be interesting to see the effect if all public companies were to restate their balance sheets in present-day values. It would not be surprising to find that a very great number of such companies were not only making a totally inadequate return on their capital, but in doing so, actually wasting both the shareholder's money and the country's limited resources. It is true of course that certain essential industries have, as a point of economic policy, to be run at an apparently unfavourable return (though the ratio will still indicate relative efficiencies within that industry).

The first point to note is the distinction between two categories of reserve: capital and revenue. Capital reserves are those which by law or custom are not available for immediate distribution to shareholders. Other reserves are revenue reserves. Secondly, an amount has now been set side for deferred tax. This is 12 BETWEEN THE LINES OF THE BALANCE SHEET made necessary by the fact that fixed assets are written off more quickly for tax than for financial purposes. Less tax is therefore paid in the early years of an asset's life than in later years.

Can they be recognised on the face of the average balance sheet? Except in cases where a business is well on to the rocks any really satisfactory assessment of solvency requires rather more information than is usually given. What is more, inquiries are hampered by the inevitable window dressing practised by so many businesses at the time the balance sheet is produced. Be that as it may, there are certain tests that may in most cases be made. In the first place it is necessary to distinguish between current assets and liquid assets.

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