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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
What are the assets in a balance sheet?
The liabilities represent investments made by the company
What are the liabilities and shareholders equity in a balance sheet?
They represent how investments are financed
Accounting definition of balance sheet (in formula form)
Assets = Liabilities + Shareholders' Equity
Three concerns to be aware of when analysing a balance sheet
- Liquidity
- Debt versus equity
- Value vs. cost
What does liquidity refer to?
- Refers to the ease and rapidity with which assets can be converted into cash
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)
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
