Thursday, December 8, 2022

The Balance Sheet: What It Is and How to Read It

What is the balance sheet?

When you hear or read about the balance sheet, you might think about its utility for real estate investors, banks, corporations or any type of business that stores its financial assets.

That’s right, the balance sheet is just the accounting for your money, right? Wrong.

The balance sheet has a role in your personal financial planning too. While banks use the balance sheet to decide if you’re going to get a loan, you can use the balance sheet to assess and predict the future profitability of your business or even the value of your own personal assets.

Why the Balance Sheet is Useful

The balance sheet is something business people use all the time, but can be more difficult for individual investors to understand.

How to read a balance sheet

Balance sheets are the result of the account balance of cash and debt in the bank, and current assets like accounts receivable, inventory, and real estate, and current liabilities like debt payments, taxes, and loan payments.

In order to be able to understand what’s going on, you need to know about cash, assets, and liabilities. Cash is the part of the balance sheet that consists of the money that is available to the business in the form of cash and deposits. Assets are the cost of goods and services that the company has that are actually their own and that are sold to customers. Liabilities are the part of the balance sheet that consists of the money that the company owes to the business’s creditors, and that is why the company has assets.

Cash: it’s always there.

What are assets?

A lot of common sense knowledge here; you should have real property and intangible assets. They are grouped together under the asset class. I discuss it more in depth later on, but let’s say, for sake of the example, that you have a farm in a rural area. If it produces crops, then that’s your crop assets. If you lease it out to a tenant farmer, then that’s your land lease assets. These assets could include land, land lease, machinery, trucks, etc. A bank will look at these and form an opinion of how good or bad the asset class is. And most importantly, how good it is for the loan that’s being prepared. If there are insufficient assets to qualify for a home mortgage, that means your bank thinks you can’t afford the home that you want to buy.

Current assets

Cash, cash equivalents, and restricted cash at end of period $ 224,418 $ 174,830 Total current assets 224,418 174,830 Total assets 257,916 176,399 Long-term liabilities 49,354 51,898 Total liabilities 51,346 51,898 Total stockholders’ equity 87,391 88,547. As with the cash flow statement, there is an order of inclusion: total assets = total current assets + total assets that are total current assets, less total current liabilities.

The Current Ratio:

The Current Ratio is a measure of how effectively the company can pay short-term obligations.

Fixed assets

“Fixed assets are assets that will continue to produce revenues whether or not the firm is operating in a growing economy, but are less able to expand and contract with economic conditions. For example, land, buildings, and equipment are assets that do not fluctuate in value over time. These assets have a lifespan and will typically have to be replaced at some point in the future. Fixed assets, like a flat tire, come with a fixed cost and therefore they are subject to the rate of inflation, and not what the consumer charges for them in the same month.

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