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Balance sheet

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What is a balance sheet?

A balance sheet is a financial statement that provides a snapshot of an organization's financial position at a specific point in time. It outlines the company's assets, liabilities, and shareholders' equity, following the fundamental accounting equation: Assets = Liabilities + Equity. This document is essential for evaluating a company's financial health and is a cornerstone of financial reporting.

Key takeaways

1
A balance sheet reflects a company's financial position at a specific moment.
2
It consists of three main components: assets, liabilities, and equity.
3
The balance sheet must always balance, ensuring accuracy in financial reporting.
4
It helps stakeholders assess liquidity, solvency, and overall financial stability.
5
It is used alongside the income statement and cash flow statement for comprehensive financial analysis.

Key sections of a balance sheet

1. Assets

Assets represent resources owned by the company that have economic value. They are classified into:

  • Current assets: These are short-term resources like cash, accounts receivable, inventory, and marketable securities that can be converted into cash within a year.
  • Non-current assets: These include long-term investments, property, plant, equipment (PPE), and intangible assets like patents or goodwill.

2. Liabilities

Liabilities are obligations the company owes to external parties. They are categorized as:

  • Current liabilities: Short-term debts or obligations due within a year, such as accounts payable and short-term loans.
  • Non-current liabilities: Long-term debts or obligations like bonds payable or long-term leases.

3. Equity

Equity represents the ownership interest in the company after deducting liabilities from assets. It includes:

  • Share capital (common or preferred stock)
  • Retained earnings
  • Additional paid-in capital

The balance sheet provides insights into liquidity (ability to meet short-term obligations), leverage (use of debt vs. equity), and operational efficiency.

Real-world examples

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Case study: Apple Inc.

As of September 2020, Apple's balance sheet revealed:

Total assets of $323.8 billion
- A decrease in cash on hand
- An increase in non-current assets
- An increase in total liabilities
- A decrease in total equity

This balance sheet demonstrates Apple's strong financial position, with significant assets and a solid equity base. It also shows how the company's financial structure has evolved, potentially indicating shifts in investment strategies or business focus.

Frequently asked questions the balance sheet.

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The balance sheet provides critical insights into a company's financial health by showing what it owns versus what it owes. It helps stakeholders assess liquidity, leverage, and solvency.
Companies typically prepare balance sheets quarterly or annually for reporting purposes. However, they may also create them monthly for internal analysis.
If total assets do not equal total liabilities plus equity, it indicates errors in accounting entries or calculations that need correction.