Know a company’s current financial health with its balance sheet

What is a balance sheet?

Companies report their financial statements through a balance sheet. It contains all of the company’s assets, liabilities, shareholders’ equity for a certain time frame, and the like. It is like a basis during a rate of return computation and capital structure evaluation. The balance sheet gives us an idea about what a company owes, owns, and the investment amount of shareholders. It comes with other essential financial statements like the cash flow and income statements during a fundamental analysis and financial ratios calculation.

If we break down a company’s finances, we will see the assets, liabilities, and equities of shareholders with smaller accounts. Even when the terms are the same, they affect the accounts depending on the nature of the business because the accounts vary by industry. On the other hand, we can find a few similar components on the way.

What can we find on a balance sheet?

A balance sheet is like an overview of the current finances of a company. It might be helpful, but it can only do so much because it can’t sense trends that appear in the long run. Hence, the balance sheet is comparable to those of the previous periods. It is also comparable to those of other businesses in the same industry because industries have different styles when it comes to financing.

There are many ratios that we get to shell out from the balance sheet, and they can help us evaluate the health and stability of a company. For example, we have a debt-to-equity ratio, acid-test ratio, and the like. We also have the income statements and statement of cash flows that give insight into a company’s finances, like how any note or addendum from an earnings report will lead us back to the balance sheet.

First, we have assets.

You will notice that the assets are listed from top to bottom, with the top being the most liquid. Liquid assets are easily converted to cash. Under assets, there we have more classifications. We have current assets which are convertible to cash within the year and noncurrent assets which are long-term and not easily accessible.

Below is a list of the current assets general order:

  • Cash and cash equivalent
  • Marketable securities
  • Accounts receivable
  • Inventory
  • Prepaid expenses

Below is a list of noncurrent assets:

  • Long term investments
  • Fixed assets
  • Intangible assets

Next, we have liabilities.

Liability is the amount that a company owes to other entities. It can be from bills it should pay to suppliers to bond interests issued to creditors to rent and wages. Current liabilities are due in a year, and long-term liabilities are due for more than a year.

Below is a list of possible current liabilities account:

  • Bank debts
  • Current portion of long term debt
  • Interest, dividends, accounts, and wages payable
  • Customer prepayments
  • Earned and unearned premiums

Below is a list of possible long term liabilities;

  • Long term debt
  • Pension fund liability
  • Deferred tax liability

Finally, we have shareholders’ equity.

The shareholders’ equity is the amount that can be attributed to the owners or shareholders. Others refer to it as net assets because it equals the company’s total assets minus the liabilities. It’s the debt that it owes to non-shareholders.

A recap

Balance sheets are financial statement reports that comprise assets, liabilities, and shareholders’ equity. It is one of the three major financial statements used in the business evaluation with income statements and statements of cash flows. It is an overview of a company’s financial status.

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About the Author: Ronald J. Merrell

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