What is a Balance Sheet?

Balance sheet items are the assets, liabilities, equity, capital stock/capital surplus, current assets, current liabilities, retained earnings, investments in affiliates, goodwill, or other intangibles. The balance sheet provides an overview of what you own and what you owe at that time.

It tells you how much money your company has to spend on its operations. This includes salaries, office supplies, rent, among other business expenses. In addition, it shows whether there’s enough cash flow from sales for ongoing expenses such as payroll.

A business with no debt will have a positive net worth, while one with lots of debts will show negative net worth. If a company has more than $1 million in total assets but only $400 thousand in annual revenues, this particular company has a high asset-to-revenue ratio.

This could mean that they have expensive equipment which may not generate any revenue. On the other hand, if a company has less than $100 thousand in total assets yet generates millions in yearly revenues, their asset-to-revenues ratio would be below.

Assets include all property owned by the company, including land, buildings, cars, furniture, machinery, inventory, computers, patents, trademarks, copyrights, etc. Liabilities refer to obligations owed by companies to others. These might include loans, government bonds, payments due under contracts, insurance policies, taxes, dues payable to creditors, etc.

Equity refers to ownership shares issued by firms. For example, Microsoft Corporation owns 100% of the outstanding common stocks as opposed to Apple Inc who holds 0%.

Capital Stock refers to the amount of equity held by shareholders. Companies use different types of capital: long term, intermediate, short term.
Current assets mean goods or services that are used up over a period of 12 months or sooner. Current Assets include both fixed and liquid. Fixed Assets like machines, vehicles, real estate, etc., take longer to convert into cash and hence require financing.

Liquid Assets like cash, bank deposits, marketable securities, treasury bills, notes, commercial paper, etc., usually do not last beyond 6 months so they need to be financed through borrowing.

Cash Flows From Financing Activities include amounts generated when banks lend funds to a firm. These is also called “cash receipts”.

Interest Income reflects any interest earned by lenders during the year. Any income received after deducting operating costs and depreciation charges is included in Operating Results.

Depreciation expense represents the cost of using up physical assets over a specified number of years. It helps businesses plan ahead and make informed decisions about purchases of new assets.

A business should maintain appropriate records of financial transactions. To ensure accuracy, these must be recorded immediately upon completion and maintained indefinitely. They give useful information to business investors, regulators, auditors, employees, and other users.

The purpose of preparing Financial Statements is to provide readers and viewers with reliable data regarding the Company’s performance. By doing so, we help them assess management’s stewardship of resources and make better investment choices. We hope our reports assist the relevant stakeholders in making informed decisions about the business.

Examples include inventories, raw materials, parts, work in process, finished products, receivables, payables, prepaid expenses, accounts receivable, etc.

Cash means funds available right now to meet immediate needs. Short-term investments are made when we need immediate returns.
Longer-term investment yields better returns but requires greater risks.

Retained Earnings refers to the income left after paying off fixed costs like wages, interest charges, rent, utilities, etc.
Investments in Affiliates refer to purchases made through subsidiaries.

Goodwill represents the value added by another firm because of its affiliation with us. Its value is usually recorded as part of our financial statements since we don’t want to lose customers just because we bought out someone else’s business.

How do I read a profit & loss statement?

A Profit & Loss Statement summarizes the performance of a company during specific periods. Usually, P&LS reports the results of a year in two sections: Income Statement and Balance Sheet.
The income statement section tells you how much money the company earned and spent, while the balance sheet reports on what kind of assets were acquired and sold. It also lists some details about the company itself.

Click here to read our article about Equity Investment.

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