How to Read & Prepare a Balance Sheet

发布于 2022-12-23  18 次阅读

reading balance sheets for dummies

When paired with cash flow statements and income statements, balance sheets can help provide a complete picture of your organization’s finances for a specific period. By determining the financial status of your organization, essential partners have an informative blueprint of your company’s potential and profitability. The balance sheet includes information about a company’s assets and liabilities, and the shareholders' equity that results. These things might include short-term assets, such as cash and accounts receivable, inventories, or long-term assets such as property, plant, and equipment (PP&E).

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. The other items of importance are retained earnings and other comprehensive income. Retained earnings are the portion of the net income retained in the business for future use after the distribution of dividends.

How to automate balance sheet reporting

That includes initial investments you or other backers have made, and earnings you’ve retained in order to reinvest in the company. The line items on your balance sheet will depend on your business. For instance, reading balance sheets for dummies if you’re a sole proprietorship, you don’t issue stock—so there’s no line item for company stock. And if you run a dropshipping business, you don’t have inventory—so there’s no line item for inventory.

This section is also divided into two subsections – Current Liabilities and Non-Current Liabilities. It is an intangible asset that arises primarily from acquisitions. Goodwill is checked for impairment every year and is written-off when it is no longer valuable. Details about the value of goodwill and its components are listed in the notes to the balance sheet. Since goodwill impairment is a value judgment, it is important to read the goodwill with notes section of the balance sheet.

Add Total Liabilities to Total Shareholders’ Equity and Compare to Assets

On the left side of the balance sheet, companies list their assets. On the right side, they list their liabilities and shareholders’ equity. Sometimes balance sheets show assets at the top, followed by liabilities, with shareholders’ equity at the bottom.

  • Cash flows provide more information about cash assets listed on a balance sheet and are related, but not equivalent, to net income shown on the income statement.
  • Current liabilities form the other end of the working capital of the business.
  • But there are a few common components that investors are likely to come across.
  • To calculate your current ratio, you divide assets by liabilities.
  • In all cases, net Program Fees must be paid in full (in US Dollars) to complete registration.

The following is an example of analyzing a real-world balance sheet. The data comes from the financial statements of Western Forest Products (WEF), a lumber company based out of British Columbia, Canada. Also called the acid test ratio, the quick ratio describes how capable your business is of paying off all its short-term liabilities with cash and near-cash assets. In this case, you don’t include assets like real estate or other long-term investments. You also don’t include current assets that are harder to liquidate, like inventory. Also called short-term assets, current assets include both cash and cash equivalents that can quickly become cash.