A balance sheet gives an at-a-glance overview of a company’s assets, liabilities and shareholders’ equity. The left side of the balance sheet lists itemized assets categorized as long-term and short-term, while the right side shows a company’s liabilities and owners’ equity, with the total of the two equaling the sum of all assets. Financial ratios that draw on data from a balance sheet typically include a debt ratio, which compares a company’s current liabilities to its current assets.
A company’s current assets are comprised of cash, marketable securities, inventory and accounts receivable. Often, these items are classified according to their level of liquidity, meaning those that can be turned into cash most quickly. This would include cash and cash equivalents, such as checking and savings accounts, as well as marketable securities and short-term investments like Treasury bills and certificates of deposit. A company’s long-term assets could include equipment, patents and trademarks, as well as intangible assets, such as goodwill and customer relationships.
On the liabilities side of the balance sheet, a company’s current liabilities are those that will come due for payment within one year, including short-term debts like accounts payable and accrued expenses, as well as the current portion of longer-term borrowing, such as the interest expense on mortgage payments or corporate bonds. A company’s long-term liabilities also include any future pension payments and the principal and interest payments on long-term loans.
The balance sheet concludes with a section for shareholder’s equity, which includes common stock value and retained earnings, or the capital investment that shareholders have contributed to the company. In addition, the balance sheet may include treasury stock, or shares that have been repurchased by the company for cash or reserved to repel a hostile takeover attempt.
While the information in a balance sheet can give an at-a-glance snapshot of a company’s financial standing, it is limited by its static nature and the fact that the information only captures a point in time. For a fuller picture, it’s best to use the more dynamic income statement and statement of cash flows alongside the balance sheet.
A company’s balance sheet is also susceptible to a number of areas of professional judgement that can alter the numbers, including the way intangible assets, such as patents and trademarks are assessed for value, and inventories are recorded and depreciated. In addition, different accounting systems and methods can create discrepancies when it comes to recording assets and liabilities.
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