Understanding Financial Statements The Balance Sheet

Understanding Financial Statements The Balance Sheet
The balance sheet is​ important to​ business operations in​ general. it​ provides a​ snapshot of​ what the company owns and what they owe to​ outside sources. The balance sheet is​ also known as​ a​ profit and loss account. By either name, this special form of​ financial statement provides great insight into an organization’s holdings.
Breaking Down the Balance Sheet
To clarify, a​ balance sheet shows how much money the organization has, how much property they own, and most importantly, how much money they owe. This is​ beneficial for outside sources to​ view bankers, investors, and even potential creditors.
The balance sheet is​ broken down into several sections. Each section is​ grouped by liquidity that is, how easily the particular asset can be converted into cash. The first section is​ short term assets. Within this category, cash is​ listed first, followed by near cash assets. Near cash assets are assets that can be easily converted into cash. Accounts receivable, money that people owe the organization, is​ also listed in​ this category.
The next category is​ the long term assets. These would include equipment, property, and buildings, along with long term accounts receivable. Generally, long term assets are assets that cannot be easily converted to​ cash within a​ year’s time.
After long term assets comes the liabilities category. This category is​ also divided into short and long term that is, short and long term liabilities. in​ this case, time is​ generally defined in​ years less than a​ year for short term, and more than a​ year for long term.
Short term liabilities would include items such as​ mortgage payments for the next year, along with utilities and equipment leases. in​ addition, short term liabilities include employee wages, usually listed as​ wages payable. Long term liabilities would include items such as​ the remainder of​ the mortgage for future years, along with equipment leases. Items here overlap, as​ time is​ the separator, not the specific item.
Uses of​ the Balance Sheet
The balance sheet is​ used internally to​ gain insight into what the company has available at​ a​ certain point in​ time. Potential creditors to​ use a​ company’s balance sheet to​ determine the cash to​ debt ratio, which would in​ turn inform them how much risk is​ involved in​ lending. Investors can use a​ company’s balance sheet to​ judge risk as​ well. For example, if​ a​ company is​ cash heavy or​ cash light, this could be an indicator of​ problems within the company. Size of​ the balance sheet is​ also an important factor in​ determining corporate health. if​ the balance sheet is​ large, this is​ an indicator of​ lots of​ activity, which may indicate positive growth. On the other hand, if​ the balance sheet is​ small, it​ may mean that the company is​ growing stagnant.
Flow and Format of​ Balance Sheets
The balance sheet is​ laid out in​ a​ specific order for a​ number of​ reasons. The first reason is​ GAAP, or​ Generally Acceptable Accounting Practices. it​ is​ a​ guideline used by all accountants to​ formalize the statements and keep communication standardized. if​ the company is​ also publicly traded, then the format of​ the balance sheet is​ required by the SEC, the Securities and Exchange Commission. The last reason relates to​ Sarbanes Oxley, a​ set of​ accounting regulation regarding internal controls designed to​ minimize fraud. Due to​ recent corporate scandals, such as​ Enron and WorldCom, regulations have been stricter, requiring more detail.
In short, balance sheets provide insight into a​ company’s holdings for all to​ see. Balance sheets are a​ highly informative tool, often open for public viewing if​ the company is​ traded publicly. Without balance sheets, it​ becomes difficult to​ gain a​ clear insight into the health of​ the company.

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