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The Financial Balance Sheet

Part I

This slideshow reviews the Financial Balance Sheet (FBS). The foundational information in this slideshow will be

used throughout the text.

• A model of the corporation used to visualize the financial functions and objectives of a firm.

The Financial Balance Sheet (FBS)

• Deals with a firm’s investments, such as: – accounts on the accounting statement – tangible and intangible assets

The Left-Hand Side (LHS)

• Deals with a firm’s sources of financing, which are divided into two kinds of claims: – Fixed claims are legally protected – Residual claims are not legally protected

The Right-Hand Side (RHS)

• Capital gained from RHS claims is used to make LHS investments. Cash generated by investments is then used to satisfy claims and/or reinvested in the company.

LHS and RHS Interaction

• The three methods of acquiring capital are trade credit, secondary trading, and retention of residual cash flows.

Capital Acquisition

• Financial managers make decisions related to both sides of the FBS: – LHS decisions include investments a firm makes – RHS decisions include sources of capital used to fund

investments

Management and the FBS