Published Articles by David Balovich
SHEET (Part 4)
The balance sheet is the most familiar of the five components as it is the one most
often received when financial information is requested.
The balance sheet contains three categories of information:
Assets, what the business owns; Liabilities, what the business owes and; Equity, what the
business has contributed and retained.
The accounting equation as it relates to the balance sheet is:
Assets = Liabilities + Equity. For financial analysis purposes the equation changes to:
Assets - Liabilities = Equity.
The balance sheet is a snapshot in time. All the information shown on the balance sheet
represents just one day in the life of the business.
Assets are either tangible or intangible. Tangible assets have a physical substance or
form whereas intangible assets do not and are therefore difficult to evaluate. Assets are
divided into three categories:
Current; these are assets that generally will be converted into cash within a 12 month
period. These include cash, securities, inventory, accounts receivable, etc.
Fixed or long term; Although these can be converted to cash at anytime they are generally
held for longer then 12 months as they are needed to operate the business. These include
land, buildings, equipment, vehicles, fixtures and can include securities.
Intangible assets are those that have value to the company but it is difficult to
determine what the market value is due to lack of substance or form. These include
patents, copyrights, customer lists, trademarks, etc.
Liabilities are broken-down into two categories, current and long term.
Current liabilities are any obligations that should be paid within a one year period;
accounts payable, taxes, current portion of long term debt, accruals, etc.
Long term liabilities are any obligations with a maturity date in excess of one year;
notes payable, debentures, deferred taxes, deferred compensation, etc.
Equity includes retained earnings, capital, common stock, preferred stock, paid in
capital, treasury stock.
In our next article we will break down the categories of the balance sheet and determine
what questions need to be answered during our analysis. We will decide, also, what needs
to be added to or deleted from the balance sheet and why.
I wish you well.
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