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Balance Sheet
by WealthEffect Staff

 
 

The balance sheet is a "picture in time"
 
  Assets  
  Liabilities  
 
1.

The balance sheet is a snapshot of a company's financial position. Whereas the income statement shows the change in a business over a period of time, the balance sheet reflects where the business stands at a given moment in time.

If a company is to earn money, it must produce something to sell — and it must have assets to create that product or service. To buy the assets, the company must find either lenders or investors. The monies borrowed from lenders are liabilities. The funds raised from investors are shareholders' equity. Accordingly, assets = liabilities + shareholders' equity.

 
 
2.

Assets come in many forms. Current assets are those which are expected to be converted to cash within a year. Examples include cash, marketable securities, inventories which are goods in production but not yet completed, accounts receivable which are IOUs from buyers, and prepaid expenses which are expenses that have been paid before they are due.

Long-term assets are comprised of property, plant & equipment, intangible assets such as goodwill (discussed soon), investments in other companies (e.g. Coke's investments in its bottling companies), and other assets.

 
 
3.

Liabilities also come in many forms. Current liabilities are those obligations that the company expects to pay within a year. These include accounts payable that are IOUs to suppliers, income taxes which are due but not yet paid, and short-term debts.

Long-term liabilities are made up of long-term debt, deferred taxes that will not be paid in the upcoming year, and the miscellaneous category of other liabilities.

Shareholders' Equity reflects the investors' contributions to the company, both from the sale of stock to these investors and from the retention of profits which are not paid out as dividends. Specifically, the capital stock and capital in excess of par value reflect the amounts raised from equity offerings, while the retained earnings reflect the profits reinvested in the business.

Note: The statement of operations and the balance sheet are interrelated. Changes in the balance sheet accounts from one period to the next are the result of changes in operations. For example, sales will affect accounts receivable, cost of goods sold will affect inventories, and profits will affect retained earnings.

To see Coca-Cola's Balance Sheet Summary, click here.

Suggestion: Go to Financial Ratios