Financial Statement Analysis: A blog around financial statements and how to analyze them.
In the same way that a physician may review a patient’s medical history, a businessperson who is constantly striving to evaluate the state of his company’s finances will frequently review estimates of his company’s performance in the past and make expectations about future how the company’s income and expenses will change in the periods to come. You are obligated to take into consideration all of these aspects whenever you are developing a financial statement for an investor. The final product is a balance sheet, which depicts a company’s assets, liabilities, and owner’s equity as of certain dates—also known as “snapshots” of the company’s condition at that point in time.
What is balance sheet?
The Balance Sheet provides a snapshot of the assets, liabilities, and owners’ equity of a corporation at a certain point in time. Since the beginning of the present period, the balance sheet has been used to track changes in assets, liabilities, and owner’s equity through time (either quarterly or annually).
The assets section of the Balance Sheet should always be your first port of call when doing a study of a company’s present financial situation. The most significant assets of the company are listed in this section. These include cash on hand, accounts receivable, inventory, as well as real estate and equipment.
A accounting equation is also included on the balance sheet. This equation displays the amount of money that has been added to or subtracted from the three primary categories that make up the balance sheet: assets, liabilities, and owners’ equity. To solve the accounting equation, first add up all of the profits (or losses) in each category and then divide that total by the total for all of the other categories for the same time period.
The assets of a business are the things that it owns. They can be tangible items such as buildings and machinery, or intangible assets such as goodwill, patents, trademarks and customer relationships.
Businesses must balance the “useful life” of assets against their value to determine if they are worth keeping.
The asset section in a company’s financial statement includes:
Property, plant and equipment – tangible assets such as equipment and vehicles
Goodwill – an intangible asset representing the difference between what you paid for an asset and its replacement cost
For example, if you buy a car for $200,000 but it only costs $20,000 to replace it after five years, then you’ve got an intangible asset worth $180,000.
Assets that are easily converted into cash and have a readily ascertainable value, such as cash on hand, accounts receivable, marketable securities, plant and equipment and long-term investments.
Liabilities that are due to be paid in the future, such as accounts payable, accrued expenses and pension liabilities.
Equity is the amount of money that a company has left after subtracting all of its liabilities from its assets. A company’s equity is often referred to as its capital or net worth.