Balance Sheet Analysis
Agenda
Recap of the Income Statement
What is the Balance Sheet
Assets
B C I A N A LY S T T R A I N I N G P R O G R A M
Liabilities
Equity
Putting it all together
Case Study
What is an Income Statement
The income statement summarizes the inflows and outflows of money
(not necessarily cash) over an accounting period
• Inflows = Revenues
• Outflows = Expenses
B C I A N A LY S T T R A I N I N G P R O G R A M
Inflow
Outflow
Outflows
Accrual Accounting
Example
B C I A N A LY S T T R A I N I N G P R O G R A M
Month 1: You cater an event where the cost to you was $100. The
customer pays you $200 for your services.
Month 2: You cater an event where the cost to you is $100. The
customer agrees to pay you $200 next month
Revenue
Expense
Profit
Cash
Accounts Receivable
Revenue
Expense
Profit
Cash
Accounts Receivable
Cash Accounting
$200
$100
$100
$100
Month 1
Accrual Accounting
$200
$100
$100
$100
Month 2
Cash Accounting
Accrual Accounting
$0
$200
$100
$100
-$100
$100
-$100
-$100
$200
Month 2
Income Statement
Line Items
B C I A N A LY S T T R A I N I N G P R O G R A M
• Start with the revenues and filter down through each expense to the
bottom line (net income/earnings)
• Revenue
• - Cost of Goods Sold (COGS)
• - Operating Expenses
• Research and Development
• Selling, General, & Administrative (SG&A)
• Depreciation & Amortization
• - Other
• Non-Recurring
• Interest
• - Taxes
• = Net Income
Balance Sheet
What is it?
• Snapshot of a company’s financial condition at a specific point in time
• Called a balance sheet because it balances
B C I A N A LY S T T R A I N I N G P R O G R A M
• Everything a company has (assets) is either owed to someone else
(Liabilities) or belongs to the firm’s owners (Equity)
Assets
The stuff that a company has
B C I A N A LY S T T R A I N I N G P R O G R A M
• Assets Definition: resources that bring future economic benefit – either the
prospect of future cash inflows or the prevention of future cash outflows
Assets
The stuff that a company has
• Assets vary in liquidity
• Liquidity – how quickly an asset can be converted to cash
B C I A N A LY S T T R A I N I N G P R O G R A M
Most Liquid

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

Least Liquid
Cash and Cash Equivalents
Accounts Receivable
Inventory & Surplus
Short-term investments
Long-term investments
Property, Plant, and Equipment
Intangibles (including goodwill)
Land
Current Assets
Long-Term Assets
Liabilities
• How does a company get these assets?
B C I A N A LY S T T R A I N I N G P R O G R A M
• They can borrow money to buy assets
• Liabilities
Liabilities
Types of Liabilities
• Accounts Payable
• Deferred Revenue
• Interest Payable
Current Liabilities
• Short-term Debt
• Current Long-term Debt
B C I A N A LY S T T R A I N I N G P R O G R A M
• Long-term Debt
• Pension Obligations
Long-Term Liabilities
Equity
• What is Equity
• The difference between a companies Assets and Liabilities
• The “book value” of a company
• Two Different Types of Equity
B C I A N A LY S T T R A I N I N G P R O G R A M
• Owner’s Equity – If the company is a sole proprietorship
• Stockholder’s Equity – If a company is a corporation
• Includes:
• Retained Earnings
• Additional Paid-In Capital
• Common Stock
• Preferred Stock
Putting it all together
Assets = Liabilities + Equity
• BCI & Company buys a factory for $1 Billion, using some of its own cash
and $400 Million of money it borrowed from the bank
• What happens to the balance sheet?
Assets
B C I A N A LY S T T R A I N I N G P R O G R A M
 $600M cash decrease
 $1000M PP&E increase
TOTAL: Assets up $400M
Liabilities
 $400M borrowed
TOTAL: Liabilities up $400M
Putting it all together
Assets = Liabilities + Equity
• BCI & Company delivers its service for $8000. The customer paid only
$1000, promising to pay the remaining in monthly installments
• What happens to the balance sheet?
Assets
B C I A N A LY S T T R A I N I N G P R O G R A M
 $1000 cash increase
 $7000 accounts receivable increase
TOTAL: Assets up $8000
Equity
 $8000 increase in retained earnings
TOTAL: Equity up $8000
The Balance Sheet
Case Introduction
• Does the balance sheet capture the real value of a company?
• Not really
• Cost Principle: Companies report assets at their historical cost
B C I A N A LY S T T R A I N I N G P R O G R A M
• Monetary Unit Assumption: Assumes the dollar is stable over time
• This creates problems
• Is a piece of land worth $20,000 in 1950 worth only that amount
today?
• What is the purchasing power of $20,000 today anyway?
B C I A N A LY S T T R A I N I N G P R O G R A M
The Balance Sheet
Case Study
The Balance Sheet
Case Study
• An asset’s book value can be higher or lower than its true value
B C I A N A LY S T T R A I N I N G P R O G R A M
• Some assets are essentially fictional
The Balance Sheet
Microsoft Case Study
B C I A N A LY S T T R A I N I N G P R O G R A M
• What happened in Q4 2012?
The Balance Sheet
Microsoft Case Study
• aQuantive was the 14th largest
advertising firm agency worldwide
in 2005
• In 2007, MSFT spent $6.3B to
acquire aQuantive
B C I A N A LY S T T R A I N I N G P R O G R A M
• It paid an 85% premium over the
then-current stock price
“Joining the capabilities of [MSFT and aQuantive] is an important
step toward our goal of becoming an industry leading, Internet-wide
advertising platform.”
- Kevin Johnson, Platforms and Services Division President, Microsoft
The Balance Sheet
Microsoft Case Study
• When you pay a premium for a company, the premium is recorded as
“Goodwill” on a balance sheet
• Example
• If BCI & Co. pays $10 for “Common Cents Investment Group” with a
B C I A N A LY S T T R A I N I N G P R O G R A M
book value of $5, what happens to BCI & Co.’s balance sheet?
Assets
• Cash will decrease $10
• Common Cents’ assets
of $5 will be added
• Goodwill will increase $5
to balance out the
transaction
B C I A N A LY S T T R A I N I N G P R O G R A M
The Balance Sheet
Microsoft Case Study
The Balance Sheet
Microsoft Case Study
• Who here uses Google?
• Who here uses Yahoo?
• Does anyone use… Bing?
• aQuantive was been never made a penny for Microsoft
B C I A N A LY S T T R A I N I N G P R O G R A M
• In 2012, Microsoft was forced to admit that their $6B of goodwill was
worth almost nothing
• In other words, Microsoft “wrote down” the worthless goodwill
B C I A N A LY S T T R A I N I N G P R O G R A M
The Balance Sheet
Microsoft Case Study