Balance Sheet

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Balance Sheet

By: iStockAnalyst Sunday, July 15, 2007 11:24 PM

Sectors: Fundamental

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Few things are as important and fundamental to discerning the financial position of a company than the balance sheet. This key snapshot shows the companys assets, liability, and owners equity. It is crucial that current and prospective shareholders understand the basics of the balance sheet and how it works.

As opposed to the cash flow and income statements, the balance sheet is a snapshot at a given time, rather than a performance over a period of time. There are two sides of the balance sheet, which creatively enough, balance each other out. This key formula is the basis of the balance sheet:

Assets = Liabilities + Equity

The gist of this equation is that assets, or the things that companies own in the production process equals its financial obligations and the amount of money available to finance its operations. Owners equity is the source of a companys funding and is the amount initially invested in the company plus retained earnings.

BASIC COMPONENTS

Assets can be broken down into current assets and long-term assets. The former are more liquid and have a lifespan of a year or less, while the latter is tougher to convert into cash. Cash, inventory and accounts receivable are included in the current asset category. Tangible assets such as factories, computers, and buildings as well as intangible assets such as patents are included in long term assets.

On the flipside, liabilities can also be characterized as current and long-term. Current liabilities are obligations that need to be paid within a year. Examples are dividends payable, accounts payable, taxes payable, and interest expense.

Owners equity is the initial amount of money invested into a firms business. If a company decides to reinvest its net earnings (after taxes) into the company, the retained earnings will be restated from the income statement onto the balance sheet.

ASSESSING NUMBERS

One useful ratio is called the Current Ratio, which can be calculated using current assets/current liabilities. This is an excellent tool to determine whether or not a company can meet its immediate obligations. There is no set rule for what this number should be, but generally 2 and higher is best.

Debt-to-equity is another useful indicator that can be found on the balance sheet. This ratio can be calculated as total liabilities/total shareholders equity. If a company takes on too much debt as a percentage of equity, bankruptcy could be on the way.

SAMPLE BALANCE SHEET

Vandelay Industries Balance Sheet December 31, 200X
Assets			Liabilities and Capital
Current Assets			Current Liabilities
Cash	$12,300		Account payable	$8,900
Account receivable	$22,900		Wages payable	$11,525
Inventory	$32,090		Total Current Liabilities		$20,425
Prepaid Insurance	$2,500		Long Term Liabilities
Total Current Assets		$679,790	Bank Loan Payable	$17,500
Fixed Assets			Total Long-Term Liability		$17,500
Equipment	$100,200		Total Long-Term Liability		$17,500
Less Accum. Deprec	($78,321)		Capital
Total Fixed Assets		$21,879	Tom Beta, Capital		$53,744
Total Assets		$91,669	Total Liabilities/Capital		$91,669

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BASIC COMPONENTS

ASSESSING NUMBERS

SAMPLE BALANCE SHEET

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