The company must produce, on a regular basis, the list of its assets and all claims related to their detention. This legal and accounting vision is perfectly justified, but, for the financiers, the balance sheet represents the investment decided by the company to manage its activity and the financing strategy associated with its business strategy.

After having described the various balance sheet items, the module reconstructs the accounting balance sheet in order to transform it into a financial balance sheet and to distinguish, on the one hand, capital employed that describes the funds invested in the firm’s operational activity, on the other hand, financial resources from capital markets (shareholders and financial creditors) that contribute to their financing. This step is fundamental because the financial logic is to convince investors to participate in the financing of the firm against a promise of return, the cost of capital, which we describe in module 5.

The financial statement presents the concepts of capital employed, including fixed assets and working capital requirement, and financial resources (shareholders’ equity and net financial debt), and then introduces the issue of liquidity, central to the financial policy of the firm.

Exercise related to the video

Once you’ve watched the video, you can do an exercise to practice what you’ve just learned and assess your understanding of the balance sheet.