Calculation Paths between Income Statement
How the Balance sheet is made even?
When you estimate Balance sheet for current and future years, it is very usual that the bottom lines do not equal. You do not, however need to correct the imbalance yourself; the model makes it for you.
Let us see how the correction is made in both situations, i.e when assets are bigger or when liabilities are bigger.
1. Assets are estimated to be bigger
There are three parameters that you have to input:
1. Minimum level of interest bearing long-term liabilities
2. Minimum level of interest bearing current liabilities
3. Share of debt allocated to long-term (interest bearing) liabilities
You may also leave the first two parameters to be zero. In this case the company do not necessary have any interest bearing debt at all. If you leave the third parameter to zero, all the generated debt are allocated to interest bearing current liabilities.
At first, the model calculates the difference of assets and liabilities. In this phase your minimum level requirements have already been taken into account. Then the model simply allocates the balance sheet differences to long-term and current liabilities according to what you have determined the share to be.
Here is an example what happens when assets are estimated to be bigger. You do not actually see this happening, it is just the logic behind the model.
2. Liabilities are estimated to be bigger
When liabilities are bigger than assets, the process is simpler. The balance sheet difference is totally allocated to Generated interest bearing financial assets. They are an item in Total financial assets.
Here is an example what happens when assets are estimated to be bigger. You do not actually see this happening, it is just the logic behind the model.
3. What happens when the situation changes?
Let’s say that first the assets are estimated to be bigger and the model has allocated the balance sheet differences to long-term and current liabilities like in example one. Then the profitability decreases rapidly and the estimates will be adjusted downwards. What happens in this situation:
The model will first reverse the adjustment it has made before, so basically opposite of the example number one will happen. While the cash generated will decrease, also the generated debt will decrease. If the model still cannot find balance with these operations, it will continue to add Generated interest bearing financial assets. The model will continue this until the balance sheet is again even.
In the opposite situation the liabilities are first estimated to be bigger, but then assets grow bigger for some reason. Again the model will first reverse the adjustments made before: It will decrease the debt to the minimum level (set by the analyst) and only after will start generating cash.
Parameter allocation – Balance sheet liabilities
Usage instructions and tips
- If you have any doubts about any item, you can always ask from us. Very often a parameter with same name should be allocated to different item depending on company and situation. I.e., even though there are many common rules, there are many situations that have to be solved case-by-case.
- Sometimes it is difficult to say only based on balance sheet information how to handle an item. In these cases Notes to financial statements may tell you the answer.
- Size matters, especially relative size. It is not very relevant where to put 10 millions in the balance sheet if it totals to 10 billions. So the bigger the item, the more it has relevance and more you should consider it.
Parameters
| Item in shareholders’ equity and liabilities | Most probable target in Excel model | Note |
| Accounts and notes payable | Non-interest bearing current liabilities | |
| Accounts payable | Non-interest bearing current liabilities | |
| Accrual liabilities | Non-interest bearing current liabilities | |
| Accrued expenses | Non-interest bearing current liabilities | |
| Accrued liabilities | Non-interest bearing current liabilities | |
| Accrued taxes payable | Non-interest bearing current liabilities | Do not confuse this with deferred tax liabilities. |
| Accumulated deficit | Retained earnings | |
| Accumulated other comprehensive income | Retained earnings | |
| Additional paid in capital | Other equity | |
| Advances received | Non-interest bearing current liabilities (Advances received) | In Excel there is an own row for advances received outside of balance sheet so that we can calculate equity ratio. However, in balance sheet you should include this in Non-interest bearing current liabilities. |
| Borrowings | Long-term / Short-term debt | |
| Capital lease obligations | Other long-term (current) liabilities | |
| Capital reserves | Other equity | |
| Capital stock | Share capital | |
| Common Stock | Share capital | |
| Cumulative translation adjustment | Other equity | |
| Currency translation adjustments | Other equity | |
| Current liabilities | – | Either this is a sum item that is not imputted to Excel or you have to allocate it to different current liabilities. |
| Current portion of long-term debt | Short-term debt | |
| Deferred income | Non-interest bearing current liabilities | |
| Deferred income taxes | Deferred tax liabilities | |
| Deferred tax liabilities | Deferred tax liabilities | |
| Deferred tax liability | Deferred tax liabilities | |
| Deferred taxes | Deferred tax liabilities | |
| Employee related liabilities | Other long-term / current liabilities | |
| Financial lease commitments | Other long-term / short-term liabilities | |
| Financial liabilities | Long-term / Short-term debt | |
| Group equity | – | This is most probably a sum item that is not imputted to Excel. |
| Income tax payable | Deferred tax liabilities | |
| Issued and paid-in share capital | Share capital | |
| Legal and statutory reserves | Other equity | |
| Liabilities | – | Either this is a sum item that is not imputted to Excel or you have to allocate it to different liabilities. |
| Loans | Long-term / Short-term debt | |
| Loans payable | Long-term / Short-term debt | |
| Long-term debt | Long-term debt | |
| Long-term financial liabilities | Long-term debt | |
| Long-term interest-bearing liabilities | Long-term debt | |
| Long-term liabilities | – | Either this is a sum item that is not imputted to Excel or you have to allocate it to different long-term liabilities. |
| Long-term provisions | Provisions | |
| Minority interest | Minority interest | |
| Minority interests | Minority interest | |
| Minority interests in consolidated companies | Minority interest | |
| Minority stockholder’s interest | Minority interest | |
| Miscellaneous long-term liabilities | Other long-term liabilities | |
| Miscellaneous short-term liabilities | Other current liabilities | |
| Negative goodwill | Other equity | |
| Net income | Retained earnings | |
| Net income (loss) | Retained earnings | |
| Net income for the year | Retained earnings | |
| Non-current liabilities | – | Either this is a sum item that is not imputted to Excel or you have to allocate it to different short-term liabilities. |
| Notes and loans | Long-term / Short-term debt | |
| Notes and loans, current portion | Short-term debt | |
| Other accounts payable | Non-interest bearing current liabilities | |
| Other accumulated comprehensive income | Retained earnings | |
| Other comprehensive income | Retained earnings | |
| Other current liabilities | Other current liabilities | |
| Other debt | Other long-term / current liabilities | |
| Other liabilities | Other long-term / current liabilities | |
| Other long-term liabilities | Other long-term liabilities | |
| Other long-term provisions | Provisions | |
| Other non-current liabilities | Other long-term liabilities | |
| Other provisions | Provisions | |
| Other reserves | Other equity | |
| Other reserves of the parent company | Other equity | |
| Paid-in surplus | Other equity | |
| Payroll taxes, social security and VAT | Non-interest bearing current liabilities | |
| Pensions and other retirement benefits | Other long-term / current liabilities | Usually long-term |
| Pensions costs | Other long-term / current liabilities | Usually long-term |
| Preferred stock | Share capital | |
| Provisions | Provisions | |
| Provisions for contingencies and long-term liabilities | Provisions | |
| Provisions for pensions and other post-employment benefits | Provisions | |
| Refundable deposits | Long-term / Short-term debt | |
| Reserves of consolidated companies | Other equity | |
| Restatement reserves | Other equity | |
| Restructuring provisions | Provisions | |
| Retained earnings | Retained earnings | |
| Salaries | Non-interest bearing current liabilities | |
| Share capital | Share capital | |
| Share issue premium | Other equity | |
| Shareholders’ equity | Share capital | |
| Shareholders’ equity, group share | Share capital | |
| Shares authorized | Share capital | |
| Shares issued | Share capital | |
| Shares outstanding | Share capital | |
| Shares repurchased | Shares repurchased | |
| Short-term borrowings | Short-term debt | |
| Short-term debt | Short-term debt | |
| Short-term financial liabilities | Short-term debt | Or sum item that is not directly imputted to Excel. |
| Short-term liabilities | Short-term debt | Or sum item that is not directly imputted to Excel. |
| Short-term provisions | Provisions | |
| Stockholders equity | Share capital | |
| Subsidies and deferred revenues | Non-interest bearing current liabilities | |
| Total current liabilities | – | Either this is a sum item that is not imputted to Excel or you have to allocate it to different short-term liabilities. |
| Total debt | – | Either this is a sum item that is not imputted to Excel or you have to allocate it to different liabilities. |
| Total group equity | – | This is most probably a sum item that is not imputted to Excel. |
| Total liabilities | Balance sheet total | Not imputted in Excel (calculated automatically). |
| Total liabilities and group equity | Balance sheet total | Not imputted in Excel (calculated automatically). |
| Total liabilities and stockholders’ equity | Balance sheet total | Not imputted in Excel (calculated automatically). |
| Total long-term debt | Long-term debt | Or sum item that is not directly imputted to Excel. |
| Total long-term liabilities | Long-term debt | Either this is a sum item that is not imputted to Excel or you have to allocate it to different long-term liabilities. |
| Total non-current liabilities | – | Either this is a sum item that is not imputted to Excel or you have to allocate it to different long-term liabilities. |
| Total provisions | Provisions | |
| Total shareholders’ equity | This is most probably a sum item that is not imputted to Excel. | |
| Total shareholders’ equity and liabilities | Balance sheet total | Not imputted in Excel (calculated automatically). |
| Trade accounts payable | Non-interest bearing current liabilities | |
| Trade liabilities | Non-interest bearing current liabilities | |
| Trade payables | Non-interest bearing current liabilities | |
| Translation differences | Other equity | |
| Treasury shares | Share capital | |
| Treasury stock | Share capital |
Company does not tell the share of interest bearing debt
Case
A company reports long-term and short-term debt, but not how they are divided into interest and non-interest bearing debt.
Solution
Even though there would be no information about the interest bearing debt in the balance sheet, the company usually tells the total interest bearing debt or the net debt in the texts of interim report or fiscal year announcement. Using these parameters you are able to estimate the needed values. So you should search (Ctrl+F) for these terms in the text.
Long-term debt
If you get the net debt figure, simply add cash & equivalents (from the assets’ side) to it in order to have total interest bearing liabilities.
Interest bearing debt = Net debt + Cash & cash equivalents
Then it is reasonable to assume that all the long-term liabilities are interest bearing. And what remains from them, can be allocated to short-term debt.
Short-term debt = Interest bearing debt – Long-term debt
On the other hand, you may directly find total interest bearing debt. Again, assume that all long-term debt is interest bearing and allocate the rest to the short-term debt.
Short-term liabilities
The part of total short-term debt that is thus not allocated to short-term interest bearing debt can be allocated to short-term non-interest bearing liabilities.
This allocation would perhaps not be exactly true, but it is fair enough because the most important thing is that total interest bearing debt is correct even though the allocation of them to short-term and long-term would be a bit inaccurate.
Detailed information in notes
Often the more detailed information can be found from “notes to the financial statements” which can be found from the annual report only. Thus normally from late January up till mid-March there is only rough information available from the balance sheet items and the analyst has to do some assumptions, which can be later on refined with annual report information.
Parameter allocation – Assets
Usage instructions and tips
- If you have any doubts about any item, you can always ask from us. Very often a parameter with same name should be allocated to different item depending on company and situation. I.e., even though there are many common rules, there are many situations that have to be solved case-by-case.
- Sometimes it is difficult to say only based on balance sheet information how to handle an item. In these cases Notes to financial statements may tell you the answer.
- Size matters, especially relative size. It is not very relevant where to put 10 millions in the balance sheet if it totals to 10 billions. So the bigger the item, the more it has relevance and more you should consider it.
Parameters
| Item in balance sheet assets | Most probable target in Excel model | Note |
| Accounts receivable | Receivables | |
| Accounts receivable trade | Receivables | |
| Allowance for doubtful accounts | Receivables | |
| Available-for-sale investments | Investments / Cash and cash equivalents | Depends on the liquidity. |
| Bank and cash | Cash and cash equivalents | |
| Capitalized development costs | Other intangible rights | |
| Cash and cash equivalents | Cash and cash equivalents | |
| Cash on hand and at banks | Cash and cash equivalents | |
| Cash, cash equivalents and short-term investments | Cash and cash equivalents | |
| Construction in progress | Tangible assets / Inventories | Inventories if the company is e.g. in construction business. |
| Current assets | – | Either this is a sum item that is not imputted to Excel or you have to allocate it to different current assets. |
| Deferred charges | Other non-current / current assets | |
| Deferred expenses | Other non-current / current assets | |
| Deferred income taxes | Deferred tax assets | |
| Deferred tax assets | Deferred tax assets | |
| Deferred taxes | Deferred tax assets | |
| Equipment on operating leases | Tangible assets | |
| Financial assets | – | Either this is a sum item that is not imputted to Excel or you have to allocate it to different current assets (usually to receivables and cash). |
| Fixed and other noncurrent assets | – | Either this is a sum item that is not imputted to Excel or you have to allocate it to different non-current assets. |
| Fixed assets | Tangible assets | This can also be a sum item that is not imputted to Excel. |
| Fixed assets and other non-current assets | Tangible assets | This can also be a sum item that is not imputted to Excel. |
| Goodwill | Goodwill | |
| Goodwill arising on consolidation | Goodwill | |
| Intangible assets | Other intangible assets | |
| Inventories | Inventories | |
| Inventory | Inventories | |
| Investments | Investments | |
| Investments and long-term financial assets | Investments | |
| Investments in affiliates and other financial assets | Investments | |
| Investments in associated companies | Investments | |
| Investments in joint ventures and equity investees | Investments | |
| Land | Tangible assets | |
| Liquid assets | Cash and cash equivalents | |
| Long-term Investments | Investments | See where this is in assets (non-current or current). If the amount is big, you should try to find out a true nature of this item (notes to financial statements). This may require case-by-case consideration so please ask from us. |
| Long-term loans receivable | Other non-current assets | |
| Machinery and equipment | Tangible assets | |
| Marketable securities and other instruments | Cash and cash equivalents | |
| Marketable securities and short-term investments | Cash and cash equivalents | |
| Non-fixed assets | Other intangible assets | |
| Other accounts receivable | Receivables | |
| Other assets | Other non-current assets / Other current assets | See where this is in assets (non-current or current). If the amount is big, you should try to find out a true nature of this item (notes to financial statements). This may require case-by-case consideration so please ask from us. |
| Other current assets | Other current assets | |
| Other financial assets | Cash and cash equivalents | See where this is in assets (non-current or current). If the amount is big and this is located in current assets, then you should try to find out a true nature of this item (notes to financial statements). This may require case-by-case consideration so please ask from us. |
| Other intangible Assets | Other intangible assets | |
| Other non-current assets | Other non-current assets | |
| Other receivables | Receivables / Other non-current / current assets | |
| Other receivables and assets | Other non-current / current assets | |
| Prepaid expenses | Other current assets | |
| Prepaid expenses and accrued income | Other current assets | |
| Prepaid expenses and deferred collections | Other current assets | |
| Property and equipment | Tangible assets | |
| Property, plant and equipment | Tangible assets | |
| Receivables | Receivables | |
| Receivables and other assets | Receivables | |
| Securities | Cash and cash equivalents | |
| Short-term investments | Cash and cash equivalents / Other current assets | Depends on liquidity |
| Short-term loan receivable | Receivables / Other current assets | |
| Start-up expenses | Other intangible assets | |
| Tangible fixed assets | Tangible assets | |
| Tax receivables | Deferred tax assets | |
| Temporary cash investments | Cash and cash equivalents | |
| Total accounts receivable | Receivables / Sum item | Either this is a sum item that is not imputted to Excel or receivables. |
| Total assets | Balance sheet total | Not imputted in Excel (calculated automatically). |
| Total current assets | – | Either this is a sum item that is not imputted to Excel or you have to allocate it to current assets. |
| Total financial assets | – | Either this is a sum item that is not imputted to Excel or you have to allocate it to cash and receivables. |
| Total fixed and other noncurrent assets | – | Either this is a sum item that is not imputted to Excel or you have to allocate it to non-current assets. |
| Total intangible assets | Other intangible assets | |
| Total non-current assets | – | Either this is a sum item that is not imputted to Excel or you have to allocate it to non-current assets. |
| Trade | Receivables | |
| Trade accounts receivable | Receivables | |
| Trade and suppliers receivables | Receivables | |
| Trade receivables | Receivables |