Business math cases

For consultants, being able to quickly and accurately assess a company's financial health is essential. A solid analysis of the financial situation enables well-informed decisions and strategic recommendations. Accounting, in particular, serves as a crucial tool, providing a clear overview of the company's assets and funding.Unlike the income statement, the balance sheet is a snapshot of the company’s status at a specific point in time. It consists of two sides: assets on one side and liabilities on the other. The asset side shows what the company owns, while the liability side reveals how these assets are funded—either through equity or debt (liabilities). These two sides must always balance: equity + debt (liabilities) = assets (or liabilities = assets). The General Structure of a Balance SheetLet’s take a closer look at the components of a company’s balance sheet:AssetsAssets include all tangible and intangible items a company owns and are listed in the balance sheet by liquidity—how quickly they can be converted to cash.Current Assets: Current assets are cash and other assets that can quickly become cash, like receivables and inventory.Fixed Assets (Long-term Assets): Fixed assets includes both tangible and intangible assets, such as buildings, machinery, trademarks, or patents. These are often long-term investments and less liquid but essential for daily operations.Liabilities and EquityLiabilities and equity show how a company’s assets are funded.Short-term Liabilities: These are obligations, such as supplier payments, due within a short period.Long-term Liabilities: Typically loans or other long-term debts with more favorable terms.Equity: This represents the owners’ capital, including the initial investment and retained earnings.Sample Balance Sheet:AssetsAmountLiabilities & EquityAmountCurrent Assets Liabilities Cash$100,000Accounts Payable$200,000Accounts Receivable$200,000Short-term Debt$400,000Inventory$1,500,000Long-term Loans$500,000Prepaid Expenses$50,000  Fixed Assets Equity Equipment$500,000Share Capital$1,500,000Land$50,000Retained Earnings$100,000Property$250,000  Goodwill$50,000  Total Assets$2,700,000Total Liabilities & Equity$2,700,000 Both sides of the sheet must balance, with assets equaling the total of liabilities and equity at $2,700,000. This balance sheet example gives a clear view of a company’s financial position at a specific point in time.A company’s assets are listed on the left side, while liabilities and equity are on the right. Both sides must balance, meaning the total assets should equal the total of liabilities and equity. This structure is the foundation of double-entry bookkeeping, where every transaction requires two entries—one on the asset side and a corresponding one on the liability/equity side. This ensures the balance sheet always stays balanced and every financial movement is accurately recorded. Cash Flow Statement and Income StatementTo get a complete view of a company’s financial health, the balance sheet is analyzed alongside the cash flow statement and income statement. While the balance sheet provides a snapshot of assets and funding, the income statement reveals profitability, and the cash flow statement gives insight into actual cash movements. Using relevant KPIs (Key Performance Indicators), these data points can be structured and compared against similar companies, providing valuable insights into financial performance and efficiency. This process, known as benchmarking, highlights strengths and weaknesses in a competitive context. 

The income statement, also known as the profit and loss statement (P&L), provides a summary of a company's annual revenues, costs, and profits/losses. It is one of the three key financial documents, alongside the balance sheet and cash flow statement.The income statement records revenues and expenses at the time they are incurred (accrual accounting). For example, an invoice appears in a company's income statement on the day it is generated, regardless of when the payment is made. In contrast, in the cash flow statement, an expense is recorded only when the payment is actually made.Example:Suppose a company sells products worth €100,000 and receives a bill for material costs of €40,000. In the income statement, the revenue of €100,000 is recorded at the time of the sale, and the material costs of €40,000 appear simultaneously. Key Terms in the Income StatementOperating revenue: All revenue generated from the regular business operations of a company.Operating costs: These are subdivided into:COGS (Cost of Goods Sold): Costs directly incurred from producing goods, such as material and labor costs.SGA (selling, general and administrative costs): Costs that cannot be easily attributed to a single product, such as general advertising expenses.Gross profit: Operating revenue minus operating costs.Non-operating revenue and costs: Income and expenses not related to the main business activity, such as revenue from selling real estate or legal costs.Depreciation: The reduction in value of assets, such as outdated machinery.Interest: Costs of debt, which are listed on the balance sheet.Taxes: Taxes paid on EBT (Earnings Before Tax).💡Prep tip: Need to freshen up your mental math skills? Try out our Mental Math Tool.