What Is a Balance Sheet?
The term balance sheet refers to a financial statement that reports a company's assets, liabilities, and shareholder equity at a specific point in time.
Balance sheets provide the basis for computing rates of return for investors and evaluating a company's capital structure.

In short, the balance sheet is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.
Balance sheets can be used with other important financial statements to conduct fundamental analysis or calculate financial ratios.

 Key Takeaways
A balance sheet is a financial statement that reports a company's assets, liabilities, and shareholder equity.
The balance sheet is one of the three core financial statements that are used to evaluate a business.
It provides a snapshot of a company's finances (what it owns and owes) as of the date of publication.
The balance sheet adheres to an equation that equates assets with the sum of liabilities and shareholder equity.
Fundamental analysts use balance sheets to calculate financial ratios.

The income statement, balance sheet, and statement of cash flows are required financial statements.
These three core statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.

Youtube An Introduction To The Balance Sheet

How Balance Sheets Work
The balance sheet provides an overview of the state of a company's finances at a moment in time.
It cannot give a sense of the trends playing out over a longer period on its own.
For this reason, the balance sheet should be compared with those of previous periods.

Investors can get a sense of a company's financial wellbeing by using a number of ratios that can be derived from a balance sheet, including the debt-to-equity ratio and the acid-test ratio, along with many others.
The income statement and statement of cash flows also provide valuable context for assessing a company's finances, as do any notes or addenda in an earnings report that might refer back to the balance sheet.

The balance sheet adheres to the following accounting equation, with assets on one side, and liabilities plus shareholder equity on the other, balance out:

{Assets} = {Liabilities} + {Shareholders' Equity}

This formula is intuitive.
That's because a company has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it from investors (issuing shareholder equity).

If a company takes out a five-year, $4,000 loan from a bank, its assets (specifically, the cash account) will increase by $4,000.
Its liabilities (specifically, the long-term debt account) will also increase by $4,000, balancing the two sides of the equation.
If the company takes $8,000 from investors, its assets will increase by that amount, as will its shareholder equity.
All revenues the company generates in excess of its expenses will go into the shareholder equity account.
These revenues will be balanced on the assets side, appearing as cash, investments, inventory, or other assets.

Balance sheets should also be compared with those of other businesses in the same industry since different industries have unique approaches to financing.

Special Considerations
As noted above, you can find information about assets, liabilities, and shareholder equity on a company's balance sheet.
The assets should always equal the liabilities and shareholder equity.
This means that the balance sheet should always balance, hence the name.
If they don't balance, there may be some problems, including incorrect or misplaced data, inventory or exchange rate errors, or miscalculations.

Each category consists of several smaller accounts that break down the specifics of a company's finances.
These accounts vary widely by industry, and the same terms can have different implications depending on the nature of the business.
But there are a few common components that investors are likely to come across.



Components of a Balance Sheet
 Assets
Accounts within this segment are listed from top to bottom in order of their liquidity.
This is the ease with which they can be converted into cash.
They are divided into current assets, which can be converted to cash in one year or less; and non-current or long-term assets, which cannot.

Here is the general order of accounts within current assets:

Cash and cash equivalents are the most liquid assets and can include Treasury bills and short-term certificates of deposit, as well as hard currency.

Marketable securities are equity and debt securities for which there is a liquid market.

Accounts receivable (AR) refer to money that customers owe the company.
This may include an allowance for doubtful accounts as some customers may not pay what they owe.

Inventory refers to any goods available for sale, valued at the lower of the cost or market price.

Prepaid expenses represent the value that has already been paid for, such as insurance, advertising contracts, or rent.

Long-term assets include the following:

Long-term investments are securities that will not or cannot be liquidated in the next year.

Fixed assets include land, machinery, equipment, buildings, and other durable, generally capital-intensive assets.

Intangible assets include non-physical (but still valuable) assets such as intellectual property and goodwill.
These assets are generally only listed on the balance sheet if they are acquired, rather than developed in-house.
Their value may thus be wildly understated (by not including a globally recognized logo, for example) or just as wildly overstated.

 Liabilities
A liability is any money that a company owes to outside parties, from bills it has to pay to suppliers to interest on bonds issued to creditors to rent, utilities and salaries.
Current liabilities are due within one year and are listed in order of their due date.
Long-term liabilities, on the other hand, are due at any point after one year.

Current liabilities accounts might include:

Current portion of long-term debt is the portion of a long-term debt due within the next 12 months.
For example, if a company has a 10 years left on a loan to pay for its warehouse, 1 year is a current liability and 9 years is a long-term liability.

Interest payable is accumulated interest owed, often due as part of a past-due obligation such as late remittance on property taxes.

Wages payable is salaries, wages, and benefits to employees, often for the most recent pay period.

Customer prepayments is money received by a customer before the service has been provided or product delivered.
The company has an obligation to (a) provide that good or service or (b) return the customer's money.

Dividends payable is dividends that have been authorized for payment but have not yet been issued.

Earned and unearned premiums is similar to prepayments in that a company has received money upfront, has not yet executed on their portion of an agreement, and must return unearned cash if they fail to execute.

Accounts payable is often the most common current liability.
Accounts payable is debt obligations on invoices processed as part of the operation of a business that are often due within 30 days of receipt.

Long-term liabilities can include:

Long-term debt includes any interest and principal on bonds issued

Pension fund liability refers to the money a company is required to pay into its employees' retirement accounts

Deferred tax liability is the amount of taxes that accrued but will not be paid for another year.
Besides timing, this figure reconciles differences between requirements for financial reporting and the way tax is assessed, such as depreciation calculations.

Some liabilities are considered off the balance sheet, meaning they do not appear on the balance sheet.

 Shareholder Equity
Shareholder equity is the money attributable to the owners of a business or its shareholders.
It is also known as net assets since it is equivalent to the total assets of a company minus its liabilities or the debt it owes to non-shareholders.

Retained earnings are the net earnings a company either reinvests in the business or uses to pay off debt.
The remaining amount is distributed to shareholders in the form of dividends.

Treasury stock is the stock a company has repurchased.
It can be sold at a later date to raise cash or reserved to repel a hostile takeover.

Some companies issue preferred stock, which will be listed separately from common stock under this section.
Preferred stock is assigned an arbitrary par value (as is common stock, in some cases) that has no bearing on the market value of the shares.
The common stock and preferred stock accounts are calculated by multiplying the par value by the number of shares issued.

Additional paid-in capital or capital surplus represents the amount shareholders have invested in excess of the common or preferred stock accounts, which are based on par value rather than market price.
Shareholder equity is not directly related to a company's market capitalization.
The latter is based on the current price of a stock, while paid-in capital is the sum of the equity that has been purchased at any price.

Par value is often just a very small amount, such as $0.01.

Importance of a Balance Sheet
Regardless of the size of a company or industry in which it operates, there are many benefits of a balance sheet,

Balance sheets determine risk.
This financial statement lists everything a company owns and all of its debt.
A company will be able to quickly assess whether it has borrowed too much money, whether the assets it owns are not liquid enough, or whether it has enough cash on hand to meet current demands.

Balance sheets are also used to secure capital.
A company usually must provide a balance sheet to a lender in order to secure a business loan.
A company must also usually provide a balance sheet to private investors when attempting to secure private equity funding.
In both cases, the external party wants to assess the financial health of a company, the creditworthiness of the business, and whether the company will be able to repay its short-term debts.

Managers can opt to use financial ratios to measure the liquidity, profitability, solvency, and cadence (turnover) of a company using financial ratios, and some financial ratios need numbers taken from the balance sheet.
When analyzed over time or comparatively against competing companies, managers can better understand ways to improve the financial health of a company.

Last, balance sheets can lure and retain talent.
Employees usually prefer knowing their jobs are secure and that the company they are working for is in good health.
For public companies that must disclose their balance sheet, this requirement gives employees a chance to review how much cash the company has on hand, whether the company is making smart decisions when managing debt, and whether they feel the company's financial health is in line with what they expect from their employer.

Limitations of a Balance Sheet
Although the balance sheet is an invaluable piece of information for investors and analysts, there are some drawbacks.
Because it is static, many financial ratios draw on data included in both the balance sheet and the more dynamic income statement and statement of cash flows to paint a fuller picture of what's going on with a company's business.
For this reason, a balance alone may not paint the full picture of a company's financial health.

A balance sheet is limited due its narrow scope of timing.
The financial statement only captures the financial position of a company on a specific day.
Looking at a single balance sheet by itself may make it difficult to extract whether a company is performing well.
For example, imagine a company reports $1,000,000 of cash on hand at the end of the month.
Without context, a comparative point, knowledge of its previous cash balance, and an understanding of industry operating demands, knowing how much cash on hand a company has yields limited value.

Different accounting systems and ways of dealing with depreciation and inventories will also change the figures posted to a balance sheet.
Because of this, managers have some ability to game the numbers to look more favorable.
Pay attention to the balance sheet's footnotes in order to determine which systems are being used in their accounting and to look out for red flags.

Last, a balance sheet is subject to several areas of professional judgement that may materially impact the report.
For example, accounts receivable must be continually assessed for impairment and adjusted to reflect potential uncollectible accounts.
Without knowing which receivables a company is likely to actually receive, a company must make estimates and reflect their best guess as part of the balance sheet.

Example of a Balance Sheet
The image below is an example of a comparative balance sheet of Apple, Inc.
This balance sheet compares the financial position of the company as of September 2020 to the financial position of the company from the year prior.


Apple Balance Sheet.

In this example, Apple's total assets of $323.8 billion is segregated towards the top of the report.
This asset section is broken into current assets and non-current assets, and each of these categories is broken into more specific accounts.
A brief review of Apple's assets shows that their cash on hand decreased, yet their non-current assets increased.

This balance sheet also reports Apple's liabilities and equity, each with its own section in the lower half of the report.
The liabilities section is broken out similarly as the assets section, with current liabilities and non-current liabilities reporting balances by account.
The total shareholder's equity section reports common stock value, retained earnings, and accumulated other comprehensive income.
Apple's total liabilities increased, total equity decreased, and the combination of the two reconcile to the company's total assets.

Why Is a Balance Sheet Important?
The balance sheet is an essential tool used by executives, investors, analysts, and regulators to understand the current financial health of a business.
It is generally used alongside the two other types of financial statements: the income statement and the cash flow statement.Balance sheets allow the user to get an at-a-glance view of the assets and liabilities of the company.
The balance sheet can help users answer questions such as whether the company has a positive net worth, whether it has enough cash and short-term assets to cover its obligations, and whether the company is highly indebted relative to its peers.

What Is Included in the Balance Sheet?
The balance sheet includes information about a company’s assets and liabilities.
Depending on the company, this might include short-term assets, such as cash and accounts receivable, or long-term assets such as property, plant, and equipment (PP&E).
Likewise, its liabilities may include short-term obligations such as accounts payable and wages payable, or long-term liabilities such as bank loans and other debt obligations.

Who Prepares the Balance Sheet?
Depending on the company, different parties may be responsible for preparing the balance sheet.
For small privately-held businesses, the balance sheet might be prepared by the owner or by a company bookkeeper.
For mid-size private firms, they might be prepared internally and then looked over by an external accountant.Public companies, on the other hand, are required to obtain external audits by public accountants, and must also ensure that their books are kept to a much higher standard.
The balance sheets and other financial statements of these companies must be prepared in accordance with Generally Accepted Accounting Principles (GAAP) and must be filed regularly with the Securities and Exchange Commission (SEC).

What Are the Uses of a Balance Sheet?
A balance sheet explains the financial position of a company at a specific point in time.
As opposed to an income statement which reports financial information over a period of time, a balance sheet is used to determine the health of a company on a specific day.A bank statement is often used by parties outside of a company to gauge the company's health.
Banks, lenders, and other institutions may calculate financial ratios off of the balance sheet balances to gauge how much risk a company carries, how liquid its assets are, and how likely the company will remain solvent.A company can use its balance sheet to craft internal decisions, though the information presented is usually not as helpful as an income statement.
A company may look at its balance sheet to measure risk, make sure it has enough cash on hand, and evaluate how it wants to raise more capital (through debt or equity).

What Is the Balance Sheet Formula?
A balance sheet is calculated by balancing a company's assets with its liabilities and equity.
The formula is: total assets = total liabilities + total equity.Total assets is calculated as the sum of all short-term, long-term, and other assets.
Total liabilities is calculated as the sum of all short-term, long-term and other liabilities.
Total equity is calculated as the sum of net income, retained earnings, owner contributions, and share of stock issued.

3 Financial Statements to Measure a Company's Strength
When looking for trade opportunities, be sure to check the income statement, the consolidated balance sheet, and the statement of cash flows.

When the stock market boomed in the 1920s, investors essentially had to fly blind in deciding which companies were sound investments because, at the time, most businesses had no legal obligation to reveal their finances.
After the 1929 market crash, the government enacted legislation to help prevent a repeat disaster.
To this day these reforms require publicly traded companies to regularly disclose certain details about their operations and financial position.

The income statement, balance sheet, and statement of cash flows are required financial statements.
These three statements are informative tools that traders can use to analyze a company's financial strengthand provide a quick picture of a company's financial health and underlying value.

This article will provide a quick overview of the information that you can glean from these important financial statements without requiring you to be an accounting expert.

Statement #1: The income statement
The income statement makes public the results of a company's business operations for a particular quarter or year.
Through the income statement, you can witness the inflow of new assets into a business and measure the outflows incurred to produce revenue.

Profitability is measured by revenues (what a company is paid for the goods or services it provides) minus expenses (all the costs incurred to run the company) and taxes paid.

The income statement is read from top to bottom, starting with revenues, sometimes called the "top line." Expenses and costs are subtracted, followed by taxes.
The end result is the company's net income—or profit—before paying any dividends, and this is where the term "bottom line" comes from.

Income statement example for YYZ Corp.* for the year ending Dec.
31, 2020 (in millions)

Income statement example for YYZ Corp. for the year ending Dec. 31, 2020 (in millions)


Revenues
2019
2020

Sales
$350
$350
Costs of goods sold
(250)
(250)
Gross profit
100
100
Depreciation expense
(10)
(10)
Taxes on income
(15)
(15)
Net income
$75
$75
Average common shares outstanding (in millions)
25
25
Earnings per share (EPS)
$3.00
$3.00
Dividends declared per common share
$0.050
$0.050


* YYZ Corp. is a hypothetical example used for illustrative purposes only.

As you can see in this example, net income declined from $75 million to $50 million.

The next line in the income statement, after net income, displays the average number of common shares of the company's stock that are held by investors.
Next comes the firm's earnings per share, which is calculated by dividing net income by the number of shares.

Finally, the last line shows the dividends declared per common share, which is the cash payment per share (if any) the company makes to stockholders.
The amount of any dividend payment is at the discretion of the company's board of directors.

Statement #2: The balance sheet
While the income statement is a record of the funds flowing in and out of a company over a given time period, the consolidated balance sheet is a snapshot of a company's financial position at a given point in time.
In other words, the balance sheet shows what a company owns (assets) and owes (liabilities) and the difference between the two (stockholders' equity).
This difference represents the book value of the stockholders' stake in the company.
It's called a balance sheet because both sides of the equation must balance: assets equal liabilities plus stockholders' equity.

The balance sheet displays:

The portion of those assets financed with debt (liability)
The portion of equity (retained earnings and stock shares)
Assets listed in order from most liquid to least liquid (in other words, assets that can be most quickly converted to cash are listed first)
Liabilities listed in order of immediacy (those that have the most senior claim on a firm's assets are listed first)



The amount by which assets exceed liabilities is listed as total shareholders' equity, and this represents the net worth of a company, or the book value of the stock.
Shareholders' equity includes common stock, additional paid-in capital and retained earnings.

Statement #3: The statement of cash flows
As with an income statement, the statement of cash flows reflects a company's financial activity over a period of time.
It shows where a company's cash comes from and how it's used to pay for operations and/or to invest in the future.
By showing how a company has managed the inflow and outflow of cash, the statement of cash flows may paint a more complete picture of a company's liquidity (the ability to pay bills and creditors and fund future growth) than the income statement or the balance sheet.



 Cash flow from operations
Income and expenses on the income statement are recorded when a company earns revenue or incurs expenses, not necessarily when cash is received or paid.
Similarly, the depreciation of owned assets is added back to net income, as this expense is not a cash outflow.

Analysts often look to cash flow from operations as the most important measure of performance, as it's the most transparent way to gauge the health of the underlying business.
A decrease in cash flow due to a sharp increase in inventory or receivables can signal that a company is having trouble selling products or collecting money from customers.

 Cash flow from investing and financing
Cash flow from investing includes cash received from or used for investing activities, such as buying stock in other companies or purchasing additional property or equipment.
Cash flow from financing activities includes cash received from borrowing money or issuing stock, and cash spent to repay loans.

Measuring a company's financial strength
The stock price for a given company can advance or decline based on a wide variety of factors.
However, companies that perform well financially by increasing their earnings, net worth and cash flow are typically rewarded with a higher stock price over time.
When it comes to trading, knowledge is power.
Even traders who generally rely on technical factors to make their trading decisions may benefit from learning to use standard financial statements to hone in on companies that are experiencing strong or improving fundamentals.