The balance sheet displays a company's financial position at a given point in time. It shows the company's assets, liabilities, and owners' equity. Assets are the economic resources of a firm such as cash, inventory, and equipment. Liabilities are the debts of a firm. Owners' equity is a claim by the owners on the assets of a firm. The relationship between assets, liabilities, and equity is as follows: Assets = Liabilities + Owners' Equity. Definitions of the terms listed in the balance sheet:
The balance sheet displays a company’s financial position at a given point in time. It shows the company’s assets, liabilities, and owners’ equity. Assets are the economic resources of a firm such as cash, inventory, and equipment. Liabilities are the debts of a firm. Owners’ equity is a claim by the owners on the assets of a firm. The relationship between assets, liabilities, and equity is as follows: Assets = Liabilities + Owners’ Equity. Definitions of the terms listed in the balance sheet:
Assets: The economic recourses of a firm. Assets are divided into two categories- current and non-current; Current Assets: All assets expected to convert to cash within 1 year. Cash: Physical cash on hand. Short Term Investments: Investments that’ll expire within 1 year. Net Receivables: The amount your customers owe you. Inventory: Raw materials, work in progress and completed saleable goods. Non Current Assets: Assets not expected to convert to cash within 1 year. Long Term Investments: Investments your company plans to keep for more than 1 year such as stocks, bonds, real estate, and cash set aside for specific projects. Property Plant and Equipment: Assets that cannot be liquidated easily such as buildings, furniture, office equipment, vehicles, and machinery. Goodwill: The difference between the price paid for a company minus their net assets. Typically comes into play after an acquisition. Intangible Assets: Assets that cannot be seen, touched, or physically measured. They include copyrights, patents, and trademarks.
Liabilities: The claims by creditors on the assets of your firm. Current Liabilities: Debts or obligations due within 1 year. Accounts Payable: How much your organization owes your suppliers. Short Term Debt: Loans due within 1 year. Non-Current Liabilities: Debts or obligations that aren’t due within the present year. Long Term Debt: Loans and financial obligations lasting over 1 year. Deferred Long Term Liability Charges: Tax liabilities that are to be paid after this year. They can also include forward contract obligations like swaps and derivatives. It’s best to look at the footnotes in the financial report to better understand what they’re comprised of.
Stock Holders’ Equity: The owners’ claim on the assets of the firm. For a publically traded company like Apple, it’s how much cash received in return for “shares” of the company. It includes retained earnings (defined below) that a company is able to accumulate over time. Preferred Stock: A form of stock that has higher claim on the assets of a firm than common stock in the event of liquidation. This stock pays a dividend, however the price doesn’t appreciate as fast as common stock. Preferred shareholders do not have voting rights. Common Stock: Common stock has the lowest priority level claim on the assets of a firm. The common stock price typically appreciates faster than preferred stocks and bonds. You probably own common stock in your investment portfolio. Retained Earnings: Earnings that are reinvested back into the business. Treasury Stock: Shares of stock that a company keeps in its own treasury. May come from a buyback or were never issued to the public in the first place. Capital Surplus: Equity that cannot be categorized as stock or retained earnings. Typically stock that was issued at a premium over par value. There are a lot of pieces to the balance sheet and you may be a little overwhelmed as you read through each definition. Don’t worry, we’re only going to focus on a few of these items when we analyze a business for investment. With that said, it is essential that you understand how a business is financially organized. I hope that I was able to help you with this.
If you have any questions please post them in the comment section below. Stay tuned for the following topic where we’ll take a look at the last (and most important) financial statement.