Balance Sheet

What Is the Balance Sheet?

The balance sheet records a company's assets, liabilities, and shareholders' equity- which show its all financial position for a period. It is likewise called the statement of financial position. The balance sheet is one of the three main parts of a company's financial statement; the other two being the income statement and the cash flow statement.
Assets, liabilities, and shareholders' equity are the main parts of the balance sheet. Assets show how a company utilizes its capital, while liabilities and shareholders' equity show its wellsprings of capital. Furthermore, a company's balance sheet its name suggests: Assets must rise to liabilities plus shareholders' equity.
Assets include accounts receivable, inventories, properties, plants, equipment, cash and different things that can be changed over into cash, while liabilities include accounts payable, deferred revenue, and long and short-term debt. Shareholders' equity-the difference among assets and liabilities-includes things, for example, retained earnings, and capital stock. The line things are all in keeping with generally accepted accounting principles (GAAP).
For publicly traded companies, the balance sheet is found in the financial statement documented quarterly and every year with the Securities and Exchange Commission.

Why Is the Balance Sheet Important?

The balance sheet gives a snapshot of a company's financial strength, and there are numerous ways of interpretting the data. It can show how a company uses its capital in view of its assets, and the way that debt can hinder its investment and growth opportunities. For instance, a company having a greater number of assets than liabilities proposes that it's highly dissolvable and have the option to send its capital to buy companies, invest in its workforce and facilities, and put to the side some money into marketable securities.
On the flip side, negative shareholders' equity could show that the company's accumulated losses surpass its capital stock, which could indicate that it's on the brink of bankruptcy. Companies that as of late opened up to the world and still can't seem to turn out a profit are likely to have accumulated losses, however are positive with their capital stock.

What Does the Balance Sheet Show?

Things on the balance sheet can be utilized to show different metrics that are useful for investors in interpreting a company's financial position.

Debt-to-Equity Ratio

One key measurement is the debt-to-equity ratio, which indicates the amount of leverage a company possesses. That is calculated by dividing liabilities by shareholders' equity.
A high ratio recommends a company has taken on a ton of debt and would take a long time for its debt to be repaid. That could likewise mean that a company would need to utilize a greater amount of its cash on debt repayment instead of deploying its capital for investment and different opportunities.

Current Ratio

The current ratio indicates a company's solvency. It is calculated by dividing assets by liabilities. A ratio of 1 or greater recommends that a company can meet its financial obligations. A ratio much lower could indicate that a company is taking on more debt than it could undoubtedly service.

Liabilities-to-Assets Ratio

The liabilities-to-assets ratio indicates how much a company owes relative to what it possesses. It is calculated by dividing liabilities by assets. A low ratio could indicate that a company is keeping its borrowings in check and can repay its debt on time. Meanwhile, a high ratio could mean that-like with a high debt-to-equity ratio-a company is using a lot of its cash in servicing debt.

What Are the Limitations of the Balance Sheet?

Examining a company's balance sheet is just a single piece of understanding a company's financial strength. It doesn't show a company's ability to create a profit as the income statement does. It likewise doesn't show how much cash a company holds and how it's deploying the cash, which can be found in the cash flow statement.
As capital stock in shareholders' equity shows, not all things entered in the balance sheet are recorded at fair value as a result of the utilization of an accounting method known as lower of cost or market (LCM), which looks at an asset's fair value and its costs yet takes the lower value. That is particularly true with inventories that have been held from now onward, indefinitely a long time, to guarantee assets aren't overinflated.
Fair value for certain things varies from market value in that the value of an asset isn't determined by market prices. The market price for inventories may be challenging to set since prices aren't generally promptly available and must be agreed upon among buyer and seller, compared to stocks and bonds, where prices are regularly set by the market and are promptly available.
Assuming that a company were to sell its assets, all's unlikely proceeds from the sales would match book value. In any case, the things in the balance sheet act as a valuable aide on how a company is managing its assets and liabilities.

Balance Sheet Example: Apple (NASDAQ: AAPL)

Below is Apple's balance sheet for 2020-2021, which shows assets equivalent to liabilities and shareholders' equity. Total assets, liabilities, and shareholders' equity show it's in a strong financial position. All assets surpass liabilities, which recommend that Apple can meet its financial obligations.
All by selling a portion of its marketable securities, for instance, the company would have the option to pay off its short and long-term debt, and it might in any case produce some profit with its remaining securities. Simultaneously, its large stockpile of cash close by could meet any immediate payment.

Highlights

• It gives a snapshot of a company's finances (what it claims and owes) as of the date of publication.
• A balance sheet is a financial statement that reports a company's assets, liabilities, and shareholder equity.
• The balance sheet sticks to an equation that likens assets with the sum of liabilities and shareholder equity.
• Fundamental analysts use balance sheets to ascertain financial ratios.
• The balance sheet is one of the three core financial statements that are utilized to assess a business.

FAQ

Why Is a Balance Sheet Important?

The balance sheet is an essential tool utilized by executives, investors, analysts, and regulators to grasp the current financial strength of a business. It is generally utilized alongside the two different types of financial statements: the income statement and the cash flow statement.Balance sheets allow the client to get an initially perspective on the assets and liabilities of the company. The balance sheet can assist users with answering inquiries, for example, whether the company has a positive net worth, whether it has sufficient cash and short-term assets to cover its obligations, and whether the company is highly indebted relative to its friends.

Who Prepares the Balance Sheet?

Depending on the company, various parties might be responsible for preparing the balance sheet. For small privately-held businesses, the balance sheet may be prepared by the owner or by a company bookkeeper. For mid-size private firms, they may be prepared internally and afterward looked over by an outside accountant.Public companies, then again, are required to obtain outer audits by public accountants, and must likewise guarantee that their books are kept to a lot higher standard. The balance sheets and other financial statements of these companies must be prepared in agreement with Generally Accepted Accounting Principles (GAAP) and must be recorded consistently with the Securities and Exchange Commission (SEC).

What Is Included in the Balance Sheet?

The balance sheet includes information about a company's assets and liabilities. Depending on the company, this could include short-term assets, for example, cash and accounts receivable, or long-term assets like property, plant, and equipment (PP&E). Likewise, its liabilities might include short-term obligations like accounts payable and wages payable, or long-term liabilities, for example, bank loans and other debt obligations.