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A balance sheet, also know as a “ statement of financial poition”, reveals a company´s assets, liabilities and owners equity (net worth). The balance sheet, together with the income statement andcash flow statement, make up the cornerstone of any company´s financial statements. If you are a shareholder of a company, it is important that you understand how the balance sheet is structured, how toanalyze it and how to read it. ( to learn more about reading financial statements see what you need to know about financial statement, what is a cash flow statement ? and understanding to incomestatement.)
How the balance sheet works
The balance sheet is divided into two parts that, based on the following equation, must equal (or balance out) each other. The main formula behind balance sheetsis.
Assets = liabilities + shareholders equity
This means that assets or the means used to operate its business, while its liabilities and equity are two sources support these assets. Owners’ equity,referred to as shareholders equity in a publicly traded company, is the amount of money initially invested into the company plus any retained earnings, and it represents a source of funding for thebusiness.
It is important to note, that a balance sheet is a snapshot of the company`s financial position at a single point in time.
Know the types of assets
Currents assets current assets have alife span of one year or less, meaning they can be converted easily into cash. Such assets classes are: cash and cash equivalents, accounts receivable and inventory. Cash, the most fundamental ofcurrent assets that can be are readily converted into cash such as U.S. treasuries. Accounts receivable consists of the short-term obligations owed to the company by its clients. Companies often sellproducts or services to customers on credit, which then are held in this account until they are paid off by the clients. Lastly inventory represents the raw materials, work-in-progress goods and the...
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