Now the word balance sheet is like a very common general term. When you get into the commerce background. You can see the balance sheet is one of the most important financial statements and is useful for doing accounting analysis and modeling.
What is the Balance Sheet
So what is the balance sheet a definition? The balance sheet is a snapshot of a company’s financial services position at a given point of time balance sheet reports. The amount of the company’s assets liabilities. You can say stockholders’ equity. The assets are current assets and long-term assets liabilities are current liabilities. The long term liabilities and stockholders’ equity includes common stock and retained earnings. what something it looks like, this is assets. this is your liability and stockholders equity current liability, long-term liability and this is your stockholder’s equity remember this one simple equation the most important equation while forming the balance sheet assets is always equal to liabilities + shareholders equity let’s get started to see unlike income statement balance sheet are much less complicated.
There are many items you need to include under few heads there are like and balance sheet portrays the overall picture of the company’s financial affairs all together so balance sheet cannot be formed without for setting up the income statement because we need to know that the retained earnings from the income statement through the income statement we can assert in the net profit and the portion of the net profit that is not distributed among the shareholders is known as retained earnings.
How to Read the Balance Sheet?
So let’s begin with balance sheet structure now how does the structure work assets are arranged on the left-hand side of the balance sheet and you can say this is your assets on the left-hand side and the liability and the shareholders equity and shareholders equity that is on the right-hand side would be on the right-hand side however in most of the cases companies put the assets first and they set up the liabilities at the bottom of the shareholders equity the total assets should be equal to the total liabilities and the total shareholders equity so assets will be equal to liabilities+ shareholders equity now balance sheet format is like you know current assets current liability long-term assets long-term liability and shareholders equity.
we’ll be discussing is current assets current assets are expected to be the to be consumed sold or converted into cash either in one year or to be or in the operating cycle which ever is longer so an operating cycle is basically an average time it is basing average time it takes to convert an investment in inventory back into cash so current assets are presented in order of a liquidity there are a few of them of the current assets the first is cash in cash equivalents cash could also include an amount required to be held for the deposit to satisfy the terms of lending agreement cash equivalents are securities example like Treasury bills that have term of lesson or equal to 90 days.
The next is the short term investments short term investment in that case short term marketable security primarily include bond investments capital stock investments short term marketable securities and are not ready as if money in your account but they provide added cushion if some immediate need what were eyes the next is inventories now in this case inventories consist of merchandise a business owns but has not sold so classified as current asset because investor assumes that inventory can be sold in the near future turning it to be cash also you know.
The next thing that we can discuss is the trade and the other receivable. So you can say the debtors is money that is owed to the company by the customer. There are some of the prepaid and accrued income. Sometimes a business you know will have to pay for the goods of the service before they actually receive the product expenses that have been paid in the occur in in the current fiscal period but that has not been subtracted from the revenue until a subsequent fiscal period.
The other current assets also include a derivative assets current income tax assets assets held for sale. Let’s have a look on that this is how it looks like cash equivalents accounts receivable inventories. This is your total current asset in the similar fashion current liability works which is of a second case current liabilities are basically the probability or probable future payments of the assets or services. A firm or is obligated to make as a result of the previous peration. This obligations are respected to require to use the existing current assets or creation of the other current assets. Which includes like accounts payable short term debts. It’s a current maturities, you can say current maturities or for long term debts. The Ltd current maturity of long term debts. This is basically any portion of the long-term debt that has to be repaid within a year of the balance sheet date and is reclassified from the non current liabilities section to the current liability section of the title. There is a thing called unearned income unearned revenue which is unearned revenues created. When the customers pay for the services the products before they delivery.
The next one is close enough to other accrued liabilities which is basically you can say they could include money owed to the employees as a salary or bonus of the company that has not yet been paid.
The next is what we are going to discuss over here is the third is long term liability. Now in case of long term liability long term assets are typically their physical assets of the that the company own and are employed in the production process of the firm. They have a useful life greater than 1-year long-term assets are not for sale for the firms customer. They are not an inventory long-term assets include a they include like tangible assets. For example, office furniture buildings then they have natural resources like the assets that have an economic value. This is derived from the earth and use over the period intangible assets which is the third thing. The assets that have no physical existence and they cannot be felt or touched or seen like copyright patent trademark franchisee goodwill and so on. So long-term assets. You can see they are generally reported at the carrying value of the book value. If the assets have has lost its revenue-generating ability. It may be written down like assets impairment amount to the return down is recorded as loss.
The fourth one that we need to discuss is the long term liability. The long term liabilities are obligations that are not expected to require the use of the current assets are not expected to create current liabilities within 1 year. The normal operating cycle whichever is longer in most of the cases contains a long term debt is subject to various covenants or restrictions long term. You know debt can be obtained from many sources and may differ in the structure or the interest and principal payments. The claim creditors have in assets of the firm. So bonds are contracted between the borrower’s and the lenders that obligates. The bond issuers to make payments to the bondholder over the period. The next thing that we need to discuss is the shareholders equity that is the fifth things shareholders equity is the resident interest of the stockholders in the assets with the corporations.
Two primary sources of the equity are the paid-in capital and retained earnings of the paid-in capital. I’ll show you a graph of the same the total owners equity it includes paid-up capital and retain earnings. This is your profit paid-in capital includes, your preferred stock that is preference shares and common stock in case of preferred stock. It includes the value at par or if at any additional in capital is coming that is the companies calling in case of common stock. Again the same thing goes around and each of this common stock know conveys certain rights like duty to attend the stockholders meeting elect directors on the word or any other matter presumptive right. So on now how to read the balance sheet see balance sheet provides very useful information about the company’s financial affairs as an investor. You need to know that how to read the balance sheet.
Some steps can help you to re-balance. The first thing is you need to know, the balance sheets equation that is the first and the foremost thing that you need to see, whether the total assets and the total liabilities and the total shareholders equity are equal that is over this assets is equal to liability plus shareholders equity. You can see in the above one then, you will look at the current assets. This assets will give an idea about the liquidity of the company and where the company expects to liquid it expects to liquidate the asset from and this assets can easily be converted into cash. You should you know to follow the non-current assets that are which includes fixed assets and intangible assets. You need to learn about the liabilities of the company yeah. Well about the liability of the company they can be both current and the non-current liability.
The last step is to look through the shareholder’s equity. So this is how you should go about check it out the retained earnings and compare it with the net profit. You will get an idea about how much the dividend is being supposed to be paid. So let’s conclude out of this learning to read a balance sheet is important. If you want to be successful as an investor and it starts with pulling out a balance sheet of a company and reading it through and thorough. If it’s your first annual reporting. Please do not get in, it get intermittent stay put you will master the balance sheet analysis over the period.