BALANCE SHEET

(STATEMENT OF FINANCIAL CONDITION)

ASSETS

•Current Assets

•Fixed Assets

•Intangible Assets

TOTAL ASSETS

LIABILITIES

•Current Liabilities

•Long Term Liabilities

TOTAL LIABILITIES

EQUITY

•Common Stock

•Retained Earnings

TOTAL EQUITY

TOTAL LIABILITIES & EQUITY

KEY CONSIDERATION POINTS FOR THE BALANCE SHEET

1.     The unique aspect of the BALANCE SHEET is that it covers only one day in time, usually the last day of the accounting period In question.

2.     The BALANCE SHEET has three (3) main divisions…Assets, Liabilities & Equity. It shows what the company owns (Assets) and owes 

        (Liabilities) as of  a certain date in time. It also shows if there is anything left over for ownership after the Liabilities have been paid. The Asset 

        section is sub-divided into  three areas; the Liability section into two areas and the Equity section is never sub-divided.

3.     CURRENT…In Finance & Accounting, ‘Current’ always means less than one year. Anything a year or more in duration is said to be one of two         things—Long Term or Fixed.

4.     The Asset Section of the BALANCE SHEET is prioritized in terms of liquidity. The most liquid assets are at the top of the Asset Section and the  

        most illiquid listed last. That is why CASH will always be the first line item in the Asset Section and those assets most difficult to turn into CASH 

        will be listed in the section entitled Intangible Assets.

5.     BALANCE SHEETS upon occasion may show more than one year of information. If they do, remember that the BALANCE SHEET covers 

        only one day in time, so there will be a year difference in time between the columns of numbers if more than one year is represented.

6.     One of the foundational formulas in Finance & Accounting is called the “Accounting Equation.” The Accounting Equation states that Assets = 

        Liabilities + Equity. That is why the TOTAL ASSETS will always equal TOTAL LIABILITIES AND EQUITY on the BALANCE SHEET.

7.     There are actually 3 Bottom Lines in Business. We use the BALANCE SHEET to calculate one of them. The Bottom Line associated with the 

        BALANCE SHEET is called RETURN ON ASSETS (ROA). RETURN ON ASSETS is a financial ratio. A ratio is simply a comparison of 

        numbers.  You take one large number and divide it by another large number and you get a smaller number that is easier to use in comparison with 

        other numbers.  Financial Ratio’s are one of the three indispensable tools needed in business. Financial Ratio’s help businesses make sound 

        decisions. RETURN ON ASSETS = NET PROFIT / TOTAL ASSETS. So, to calculate RETURN ON ASSETS (ROA) you take NET 

        PROFIT (found on the Income Statement) and divide it by TOTAL ASSETS. RETURN ON ASSETS (ROA) is crucial because it lets you know 

        if the investments made in the company’s assets have been well spent. Managers rely heavily on ROA.

8.     WORKING CAPITAL is a concept used by bankers and financial institutions to determine credit worthiness. They want to know if the company 

        has enough liquidity to pay its bills. WORKING CAPITAL is simply Total Current Assets less Total Current Liabilities.

9.     Bankers and financial institutions also use another financial ratio to help determine a company’s liquidity capability. CURRENT RATIO = 

        CURRENT ASSETS / CURRENT LIABILITIES. When a company’s Current Assets are divided by their Current Liabilities financial analysts 

        have a number they can compare to industry standards and their own experience. They will also track this ratio from year to year to determine how 

        a company is ‘trending’ in terms of having enough liquidity to meet obligations.

10.   SOLVENCY is a concept financial analysts use to determine the overall health of a company. SOLVENCY = TOTAL ASSETS – TOTAL 

        LIABILITIES. The degree to which the company’s TOTAL ASSETS exceed its TOTAL LIABILITIES gives an indication of its stability.

11.   Within the matrix of Financial Ratios is a relationship known as “COMMON SIZE RATIOS.” Simply put, you take one number and compare 

        every other number to that foundational number, or what is referred to as the ‘Common Number.’ The COMMON NUMBER on the 

        BALANCE SHEET is "TOTAL ASSETS." You then take every number on the BALANCE SHEET and divide it by TOTAL ASSETS. The  

        relationship  expressed will be in a percentage instead of a dollar amount. Percentages are better for comparison and can be used from year to 

        year to determine trends. Financial analysts rely heavily on this concept.

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