Analysis of Balance Sheet

A BALANCE SHEET, is an important tool for any investor to know the financial position of the companies. It is also known as a “statement of financial position,” which reveals company’s assets, liabilities and owners’ equity. The balance sheet, together with the income statement and cash flow statement, makes the complete company’s financial statements. If you are a shareholder of a company, it is important that you understand how the balance sheet is structured, how to analyze it and how to read it.

The balance sheet is divided into two parts-Equities & Liabilities and Assets. The main formula behind balance sheets is:

Assets = Liabilities + Equity

Assets are what a company uses to operate its business, while its liabilities and equity are two sources that support these assets. Equity refers to the amount of money initially invested into the company plus any retained earnings and it represents a source of funding for the business.

Know the Types of Assets

Current Assets

Current assets have a life span of one year or less, meaning they can be converted easily into cash. Such assets include cash and cash equivalents, accounts receivable and inventory.

Cash, the most fundamental of current assets, also includes non-restricted bank accounts and checks. Cash equivalents are very safe assets that can be readily converted into cash.

Accounts receivables, consist of the short-term obligations owed to the company by its clients. Companies often sell products or services to customers on credit; these obligations are held in the current assets account until they are paid off by the clients.

Lastly, inventory represents the raw materials, work-in-progress goods and the company’s finished goods

Non-Current Assets
Non-current assets are assets that are not turned into cash easily and have a lifespan of more than a year. They can refer to tangible assets such as machinery, computers, buildings and land. Non-current assets also can be intangible assets, such as goodwill, patents or copyright. While these assets are not physical in nature, they are often the resources that can make or break a company – the value of a brand name, for instance, should not be underestimated.

Depreciation is calculated and deducted from most of these assets, which represents the economic cost of the asset over its useful life.

Know the Types of Liabilities
Liabilities are the financial obligations a company owes to outside parties. Like assets, they can be both current and long-term.

Long-Term Liabilities are debts and other non-debt financial obligations, which are due after a period of at least one year from the date of the balance sheet.

Current Liabilities are the company’s liabilities that will come due, or must be paid, within one year. This includes both shorter-term borrowings, such as accounts payables, along with the current portion of longer-term borrowing, such as the latest interest payment on a 10-year loan.

Shareholders’ Equity
Shareholders’ equity is the amount of money invested into a business. If, at the end of the fiscal year, a company decides to reinvest its net earnings into the company (after taxes), these retained earnings will be transferred from the income statement onto the balance sheet and into the shareholder’s equity account. This account represents a company’s total net worth. In order for the balance sheet to balance, total assets on one side have to equal total liabilities plus shareholders’ equity on the other.

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