Balance Sheet

When applying for a loan, the lender wants to know two important things: how much money does the borrower make?, and what kind of collateral does he have?

The borrower could submit a statement of cash flow showing all sources of income minus expenses. But the lender would also like to see what kind of assets he is holding minus his liabilities.

The basic formula for the balance sheet is expressed as:

Assets = Liabilities + Stockholders' Equity
Assets — Liabilities = Stockholders' Equity

Assets represent what a company owns. Liabilities represent what a company owes. We take what a company owns, subtract what it owes, and that is the net worth of the company. Another name for net worth is stockholders' equity

Assets are divided into three types.

 The first type is current assets. Current assets represent cash and anything that could be converted to cash in the short-term: cash & equivalents, accounts receivable, and inventory. Cash is cash, and it's a good thing.
 "Equivalents" are money market instruments earning some interest, which is also a good thing. If they mature in the near term, commercial paper, bankers' acceptances, repurchase agreements, and T-Bills are considered "cash equivalents" here on the balance sheet.

 The second type of assets, fixed assets, include office buildings, factories, equipment, furniture, etc. This is the stuff a company uses as opposed to putting directly into its finished products. Fixed assets could all be converted into cash, but this stuff was not purchased to be sold; it was purchased to generate revenue: printing presses, industrial control systems, fleet of delivery vans, etc. A large corporation lists the value of the real estate, as well as the value of the assembly line equipment, as well as the furniture and even the artwork hanging on the walls of the visitor lobby, under fixed assets.

Then there are intangible assets. Intangible assets include patents, trademarks, and goodwill. When a company acquires another company, they usually pay more than just the value of the fixed assets. They're paying for the brand-identity, the customer base, etc. So, that excess paid above the hard, tangible value of assets you can touch and see is called "goodwill."
Then, we would add all three types of assets and call the sum your total assets.

On the other side of the equation we find liabilities, which represent what a company owes. Anything that must be paid in the short term is a current liability. Ac-counts payable, accrued wages, and accrued taxes all represent bills the company must pay currently, which is why they're called current liabilities

Stockholders' Equity/Net Worth
Stockholders' Equity is sometimes called Shareholders' Equity or "net worth." What¬ever we call it, equity equals ownership, and the stockholders own a percentage of the company. What is that ownership worth at the time the balance sheet is printed? That is stockholders' equity.

Companies place the total par value of their preferred stock under this heading. Common stock is assigned a par value of, say, $1, so if a company has 1,000,000 shares of common stock, they would list the par value as $1,000,000 and place it under stockholders' equity.

If investors bought the stock in the IPO at $11, that represents a surplus of $10 above the par value, so the company would list paid-in surplus of $10,000,000, as well. And then any earnings that have been retained are listed as retained earnings.

Defiance between  income statement and  balance sheet

The balance sheet.. is a snapshot of the company's financial strength at the time the report is run. The report could change weekly, even daily.

The income statement, shows the results of the company's operations over previous financial quarters and fiscal years. Once that report is run, it never changes.

The income statement,  can also be referred to as a "statement of earnings" or "statement of operations,"
while the balance sheet is often referred to as the "statement of financial condition."


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