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Statement of financial position (or balance sheet)

  • Is an accountant's snapshot of a firm's accounting value at a particular date
  • It has two sides: on the left the assets and on the right the liabilities and shareholders equity 
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What are the assets in a balance sheet?

The liabilities represent investments made by the company

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What are the liabilities and shareholders equity in a balance sheet?

They represent how investments are financed

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Accounting definition of balance sheet (in formula form)

Assets = Liabilities + Shareholders' Equity

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Three concerns to be aware of when analysing a balance sheet

  • Liquidity
  • Debt versus equity
  • Value vs. cost
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What does liquidity refer to?

  • Refers to the ease and rapidity with which assets can be converted into cash
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What are the different kinds of assets that can be turned into cash for liquidity? 

  • Current assets are the most liquid
  • Trade receivables are amounts not yet collected from customers for goods or services sold to them
  • Inventories are composed of raw materials 
  • Non-current assets are the least liquid kind of assets
  • Tangible non-current assets include property, plant, and equipment and do not convert to cash from normal business activity
  • Intangible non-current assets have no physical existence but can be very valuable (ex: trademark, patent)
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What is debt vs. equity? 

  • Liabilities are debts (contractual obligations to be repaid)
  • Shareholders' equity is the residual difference between assets and liabilities
  • Assets - Liabilities = Shareholder's Equity 
  • Shareholder's equity can then be understood also as shareholders' ownership