The Balance Sheet
While the Income Statement reports on the company’s profitability over a certain period of time (in general one year), the Balance Sheet provides a snapshot of a business financial position at a specific point in time. Thus, the balance sheet captures the cumulative effect of financial decisions made in the past.
- Current assets: liquid assets that can be converted into cash within the firm’s normal operating cycle.
- Receivables: payments due from its customers for previous credit sales (current asset).
- Inventories: raw materials, work in progress and finished products held by the company for eventual sale.
- Fixed Assets: gross fixed assets – accumulated depreciation (net book value=non-current asset).
- Payables: outstanding credit payable to suppliers withing 12 months (current liab).
- Accured expenses: short-term liabilities that have been incurred but not yet paid (current liab).
- Long-term debt: loans from banks or other sources with repayment terms of more than 12 months.
- Owners Equity: owners investment in a company plus retained profits reinvested in the firm less dividend paid.
ASSETS=LIABILITIES + EQUITY
Assets are financed by creditors and owners money. Assets are used to generate a profit and thus a return on investment. The best way to measure a company’s profitability is return on assets or operating profit / total assets.
What is the Balance Sheet useful for?
- A. it allow to see how the company is financed.
- B. by comparing year 1 BS vs year 2 BS we can see how the company is using/investing the money and how much return is that money generating.
Tags: assets, balance sheet, equity, liabilities