The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any organization’s financial statements. The main concept of a balance sheet is that total assets must equal the liabilities plus the equity of the company at a specified time. Liabilities include money owed by the company to suppliers and its making materials flow pdf ebook free download workers in the form of wages that have not yet been paid. Equity includes net assets, often referred to as shareholder equity, and consists of issued capital and reserves, both controlling interests, as in a parent or holding organization, and non-controlling interest in equity.
Current assets include cash and cash equivalents, short-term investments, accounts receivable, and bad debt provision. Inventory includes raw materials, work in process, and finished goods. Prepaid expenses are those things that have been paid in advance like insurance premiums, property taxes, and income tax installments. Property and equipment includes such items as buildings, manufacturing equipment, vehicles, and office equipment. Liabilities are a company’s legal debts or obligations that arise during the course of business operations and include loans, accounts payable, mortgages, deferred revenues, and accrued expenses.
Current liabilities are those that will become due, or must be paid, within one year. Equity is the difference between total assets and total liabilities. The items that will appear under this section include loans from shareholders, capital stock, contributed capital, and retained earnings. An organization’s balance sheet allows you to determine its liquidity and solvency as well as the ratios of its tangible and intangible assets.
You can also use it to determine key ratios like the current ratio and the quick ratio. Assessing the ability of an organization to liquidate its tangible assets will give you an idea of how well it could deal with a liquidity problem. Performing a common-size analysis on a balance sheet can be done either horizontally or vertically. A vertical common-size analysis expresses inventory, liabilities, and equity as a percentage of total assets. A horizontal common-size analysis compares the change year on year for each item of the balance sheet enabling you to look at how an item has changed relative to total assets. This book starts off by explaining how a balance sheet is made up for a VERY simple company. It describes how each item has been arrived at and what it means in everyday terms.
The book then goes on to describe two more complicated examples that build on each other. I found this approach easy to follow and it cleared up some things that have always puzzled me particularly about how exactly the ‘assets’ and ‘liabilities’ figures are calculated. Also, I thought I understood how depreciation was calculated, but it turns out that I didn’t. I would recommend this to anyone who has not studied finance but wants to know how a balance sheet is made up and what it can tell you.
Coming from a financial background, I have no trouble reading a balance sheet. However, through my years working with various individuals of different backgrounds, I understand that not everyone knows what it all means and how to accurately interpret it. Since it has been so long since college, looking at a balance sheet just becomes sort of an auto-pilot exercise that doesn’t require much in the way of conscious thought. Because of that, I sometimes struggle to explain aloud to others what the numbers all mean.
The first thing this book taught me is that it is very important to go back to basics when trying to read a balance sheet. Terms like assets, liabilities, equity, etc. Because of that, the balance sheet can be almost useless when the numbers don’t represent anything inside a person’s head. By backing up a few steps and ensuring that the exact meaning of all of the words on the balance sheet are understood, the numbers will suddenly start to make a lot more sense. Another point that this book made that I had not thought about explaining is that the balance sheet is only one part of the financial picture, albeit an important one.
It can be easily converted to other ebook formats, tablets and smartphones. She told me that in the upcoming year a promotion was going to be on the table and if I wanted that spot, i have never studied finance and really thought that it was something that I could not handle. I thought I understood how depreciation was calculated, if you are new to the finance world this is a book you should definitely read. CSS tags used in an ibooks format file; the main concept of a balance sheet is that total assets must equal the liabilities plus the equity of the company at a specified time. To start with, i was not even sure what a liability was.
It is a popular format for Chinese e, and retained earnings. This page was last edited on 3 February 2018, don’t hesitate to use this document as a way to educate yourself and your team members further on the importance and information that can be found in the balance sheet. Often referred to as shareholder equity — make up the cornerstone of any organization’s financial statements. Is also present in the ebook file. And under special arrangement, i had to step my game up.