Understanding Balance Sheets

An activity by Ivan Garth
Activity by Steven Starry - (Profesor en Alcorcón)


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Understanding Balance Sheets

There are three that are necessary for analysing businesses. This analysis may be to investment decisions of potential , aid investment decisions to be made by the actual company or even that need to decide whether to trust their money in the company .
For example, shareholders use these statements to know how their money is doing and the management of the company needs these statements to understand how the company is working, its evolution and .
These three statements are:
- this tells us what a company has, and what's left for the .
- this tells us how much a company is making; its .
- this tells us where the money has gone.
The above explanation is true but is over-simplified as these three financial statements can tell us about the company and , if you have statements from two or more financial periods.
What we are going to do today is explain the Balance Sheet. The Balance Sheet is a of the company's at any one moment in time, usually at . Normally, two balance sheets at two different moments are presented; this gives us extra information as it also allows us to understand how the company's financial condition has evolved. But let me explain what a Balance Sheet is in very simple day-to-day terms. Imagine you need a to buy a new car. The asks you to provide him with your , so you go home and sit in front of a blank piece paper, a pen, those dusty financial documents and you divide the page in two, writing everything you have on one side, such as your house, investments, etc. with their corresponding and on the other what you owe, e.g. your . The difference between the two sides is your . Well, this is your personal Balance Sheet and companies do the same...
So, to a more technical explanation, a Balance Sheet has three main areas - , and and these must keep to the accounting equation:
Assets = Liabilities + Shareholder's Equity
So as its name suggests the Balance Sheet must , but... What do these three elements mean?
are that are expected to produce economic benefits for its owners. Assets can be and used . They can be patents or copyrights that provide financial advantages for their holder or even money owed to them by their customers.
are obligations a company owes to . They represent or services of the company. Examples include bank loans, or to .
is the value of a business to its owners after all of its obligations . This (the difference between what it owns and what it owes) to the owners. Shareholders' equity generally reflects the amount of capital the owners invested plus any that the company generates that are subsequently reinvested in the company. This reinvested income is called

Those of you less familiar with financial statements are probably wondering what a typical Balance Sheet looks like, so take a look below:

CHOCOLATE FACTORY PLC.
Consolidated Balance Sheet - March 31, 2005

     
ASSETS    
Current Assets

Mar. 31, 2004

Mar. 31, 2005

   Cash and Cash Equivalents €673,030,000 €596,070,000
   Short Term Investments

€27,010,000

€74,370,000

   Receivables €650,090,000 €665,260,000
   Inventories €394,420,000 €398,120,000
   Prepaid expenses and other €704,850,000 €663,780,000
   Total CURRENT ASSETS €2,449,400,000 €2,397,600,000
     
Long Term Assets    
   Long Term Investments €3,007,730,000 €3,298,920,000
   Property, Plant and Equipment €1,542,160,000 €1,578,790,000
   Goodwill

€709,290,000

€725,200,000

   Intangible Assets €9,435,000 €16,217,000
   Accumulated Depreciation (or Amortization)

€247,230,000

€289,900,000
Total ASSETS €7,965,245,000 €8,306,627,000
     
LIABILITIES    
Current Liabilities    
   Accounts Payable

€3,441,000,000

€1,658,710,000
   Short Term Debt

€7,770,000

€1,988,010,000
   Total CURRENT LIABILITIES

€3,448,660,000

€3,646,720,000
     
Long-Term Liabilities    
   Long Term Debt €308,950,000 €315,980,000
   Other Liabilities €371,480,000 €333,740,000
   Deferred Long Term Liability Charges €132,460,000 €184,260,000
   Total LIABILITIES €4,261,660,000 €4,480,700,000
     
SHAREHOLDER'S EQUITY    
   Common Stock €569,130,000 €867,000,000
   Retained Earnings €7,877,485,000 €7,702,227,000
   Treasury Stock (€4,918,410,000) (€4,869,200,000)
   Capital Surplus €1,182,520,000 €956,080,000
   Other Stockholder Equity (€1,007,140,000) (€573,870,000)
   Total SHAREHOLDER'S EQUITY €3,703,585,000 €3,825,927,000
Total LIABILITIES & SHAREHOLDER'S EQUITY €7,965,245,000 €8,306,627,000

In the example you can see the three big areas of the Balance Sheet and how these actually balance. You can also see that each area can be broken down into various other smaller elements, but these I will explain another day...