How to Read a Balance Sheet Financial Statement

Balance sheet
Balance sheet

Balance Sheet

Want to learn how to read a balance sheet and what does it mean well you are about to learn. Let’s jump in. There are 5 parts of a balance sheet. Current assets, long term assets, current liabilities, long term liabilities, and shareholders’ equity. These items reflect the company position at the end of the quarter or fiscal year. You use the balance sheet to find company financial ratios like the quick ratio and determine the financial health of the company. The left side of the balance sheet tells you what you are looking at.

Current Assets

Current assets are assets that are short term in nature and liquid. The top of the list is Cash and cash equivalents. This includes bank accounts money markets and anything readily accessible as spendable dollars.

Marketable securities are short term investments. They consist of stocks or bonds if they are in a liquid market and are easily converted into cash quickly. They are an emergency fund used in an emergency event or last-minute business uses.

Inventories are just that, the inventory of the business. In this case it is the Iphones, Ipads, Iwatches, and whatever else Apple has in inventory. Inventories can be used to show the health of the business. High or low inventory levels can indicate differences in sell through or expectations.

Vendor non-trade receivables consist of things that are sold on account and paid for yet. When you see an Iphone in Walmart it was probably purchased through this system.

Other current assets consist of everything else, think of it like change in your couch but in the billions of dollars (huge couch). That sums up current assets now that was not so bad was it.

Long Term Assets

From there we move on to long term assets. Long term assets consist of thing that will last the company more than one year. In this case marketable securities are stocks and bonds that are owned more than one year.

Property, plant and equipment include buildings, desks, computers, machinery, or anything expected to last over one year. What about pencils and staples you ask? No, those are not included, things that you consume in weeks or months are taken as an expense on the income statement.

Now we have other non-current assets. These are the investments that Apple has in other companies. I would list some, but I do not know any off hand. These assets could be sold but not quickly and for an indeterminate amount.

Liabilities

Liabilities are what the company owes to others. They are very important parts of how to read a balance sheet.

Current Liabilities

Current liabilities are owed within the next year. Accounts payable are credit accounts from suppliers that are owed. In the case of Apple, it includes the companies that supply the chips, glass, and other parts for the products produced as well as other things they purchase on account.

Other current liabilities include any debt not categorized in another line.Deferred revenue is also known as unearned revenue. It is prepaid services. Say for example you pay for a year of services and only used three months so far. They owe you the other 9 months. That is why it shows up as a liability, they owe you cash or services.

Commercial paper is generally unsecured debt used to finance inventory or other short-term debts. It is used as a part of a total cash management plan to minimize the cost of capital.

Term debt is short term debt that is paid in the next year. This includes bonds, loans, and other credit facilities due in the next year.

Getting Close to the end, only two more sections to go and they are the small ones!

Long Term Liabilities

Non-current liabilities are the liabilities that need to be paid over one year from that time. We will start with term debt. Term debt consists of loans and bond issues due over one year from the time the statement is made.

Other non-current liabilities include all liabilities that are due over one year from the time the statement is written and are not categorized as term debt.

Equity

Shareholders equity is an important part of how to read a balance sheet it is the value of the company that is attributable to shareholders. The first line is additional paid in capital. This is the amount paid to the company above the par value.

Retained earnings are the total amount of earnings the company has made that it has not paid out in dividends or stock buybacks.

Total equity is the total assets minus the total liabilities or could be considered the net worth. This is generally referred to as book value and is used in valuation metrics for the stock.

Total liabilities and shareholders’ equity will always equal the total assets. That is why it is called a balance sheet, because it must balance.

One formula you should know is the current ratio. The current ratio is the current liabilities divided by the current assets. This is a measure of a company’s ability to pay its short term debts. I do not know a hard rule for what it should be but the closer this is to one the harder time the company will have paying dividends, at least in the short term.

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