Financial Statements:
The Balance Sheet
Ryan Holliday ‘14
Colgate Finance Club
4/3/2011
Balance Sheet
Assets: what the enterprise has today
Liabilities: how much the enterprise owes today
Equity: what the enterprise is worth today
Assets – Liabilities = Worth
“Have” – “Owe” = “Value to owners”
Assets = Liabilities + Worth
*Must always balance out
Balance Sheet Continued
 Found in a public company’s 10-k report
 The specific accounts on balance sheets will vary by
company and industry
 Look at statements from the past 5-10 years, they will tell
you much more than just looking at a single year
Assets
 Everything that you own (cash, inventory, machines, etc.)
 Grouped by different characteristics:
• Very liquid assets – cash and securities
• Assets for sale – inventory
• Productive assets – plant and machinery
Asset Section of Balance Sheet
Current Assets
• Assets that are expected to be converted
into cash in less than 12 months
• Listed in order of liquidity
Cash
• Most liquid asset
• If you write a check to pay a bill, money
will be taken out of this category
Accounts Receivable
• When a company ships a product to the
customer on credit, the company gains the
right to collect money from that customer
within a specified time in the future
• Commonly given 30 or 60 days to pay
Inventory
• Finished products ready for sale and
materials to be made into products
• As finished goods are sold, they become
accounts receivable and then cash once the
customer pays
Prepaid Expenses
• Bills paid for services that have not yet been
received (prepaid insurance payments, deposits
paid to the telephone company, etc.)
• Current assets because the enterprise will not have
to use cash to pay for them in the future. They have
already been paid for.
Other Assets
• Assets that cannot be classified into
“current asset” or “fixed asset” categories
Ex: brand name, patent, copyright
Fixed Assets at Cost
• Productive assets that will be used over
and over again in the production of the
product
Ex: land, buildings, machinery, etc.
• Reported at original purchase price
Accumulated Depreciation
• Records the decline in value of fixed assets
due to wear and tear from use and time
• Sum of all depreciation charges since the
asset was first purchased
Net Fixed Assets
= Fixed Assets – Accumulated Depreciation
Liabilities & Equity
 Liabilities – obligations of the company
• Ex: money owed to lenders, suppliers,
employees
 Shareholders’ equity – value of the company that
belongs to its owners
Liabilities & Equity of
Balance Sheet
Current Liabilities
Bills that must be paid within 12 months
Grouped depending on to whom the
debt is owed
Accounts Payable
 Bills, typically to other companies for products
bought on credit, that the company must pay soon
 Payment terms are typically 30 or 60 days,
sometimes with a discount for early payment
Accrued Expenses
 Monetary obligations similar to accounts payable
ex: salaries not yet paid to employees, lawyer
bills not yet paid
Current Portion of Debt
Money owed within the next 12 months
Includes portion of long-term debt that is
due within 12 months
Income Taxes Payable
Income taxes from sales that the company
owes the government but has not paid
Capital Stock
Amount of money raised through issuing
equity, includes common and preferred
stock
Retained Earnings
Profits that have not been returned to the
shareholders as dividends
Shareholders’ Equity
Sum of the investment in stock of the
company plus profits less dividends paid out
Increases when the company (1) makes a
profit, or (2) sells new stock
Ratio Analysis
Indicators of:
Liquidity
• Current, Quick, Cash Ratios
Asset Management
• Inventory Turn, Asset Turn Ratio
Profitability
• ROA, ROE
Leverage
• Debt-to-Equity, Debt Ratio
Current Ratio
Current Ratio =
Current Assets
Current Liabilities
Measures if current assets are sufficient to
pay current liabilities
Higher the ratio, the more liquid the
company is and the greater its ability to pay
current liabilities when they come due
Quick Ratio
Quick Ratio =
Cash+Receivables
Current Liabilities
More conservative than the Current
Ratio
Measures the ratio of “quick assets” to
current liabilities, leaves out inventory
Cash Ratio
Cash Ratio =
Cash+Cash Equivalents
Current Liabilities
More conservative than the Quick
Ratio
Looks at only the most liquid
current assets
Inventory Turn
Inventory Turn =
Cost of Goods Sold
Inventory
Measures the volume of business
that can be conducted with a given
investment in inventory
If sales slow down, inventory can
balloon and the inventory turn will
decrease, a sign of trouble
Asset Turn Ratio
Asset Turn Ratio =
Annual Sales
Assets
Measures the sales volume that a
company can support with a given
level of assets
Companies with low asset turns will
require a large amount of capital to
generate more sales
Return of Assets (ROA)
Return on Assets =
Net Income
Total Assets
Measures management’s
success in employing the
company’s assets to generate
profits
Return of Equity (ROE)
Return on Equity =
Net Income
Shareholders′ Equity
Measures management’s success in
maximizing return on the owners’
investment
Companies that show high ROE usually
benefit from a competitive advantage
Also called “Return on Investment” (ROI)
Debt-to-Equity Ratio
Debt to Equity Ratio =
Current+Long−Term Debt
Shareholders′ Equity
Shows how much debt the company has
relative to its investor equity
A company with a competitive advantage will
be using its earning power to finance its
operations and should show a low ratio
(below .80)
Debt Ratio
Debt Ratio =
Current+Long−Term Debt
Total Assets
Measures the amount of debt relative
to the total assets
Varies based on industry (auto tends
to have higher ratios)
Bibliography
Ittelson, Thomas R. Financial Statements: a
Step-by-step Guide to Understanding and
Creating Financial Reports. Franklin Lakes,
NJ: Career, 2009. Print.
Investopedia.com