Balance Sheet

Structure

The balance sheet lists the firm’s assets and liabilities on the left and right sides:

• Left side:
  • Current assets: Cash and other marketable securities
    • Short-term, low-risk investments
    • Easily sold and converted to cash
    • Accounts receivable: Amounts owed to the firm by customers who have purchased on credit
    • Inventories: Raw materials, work-in-progress and finished goods
    • Other current assets: catch-all that includes items such as prepaid expenses
  • Long-term assets: Assets that produce tangible benefits for more than one year
    • Recorded value reduced through a yearly deduction called depreciation according to a schedule that depends on an asset’s life span. Depreciation is not an actual cash expense, but a way of recognizing that fixed assets wear out and become less valuable as they get older
    • The book value of an asset is its acquisition cost less its accumulated depreciation
    • Other long-term assets can include such items as property not used in business operations, start-up costs in connection with a new business, trademarks and patents, and property held for sale
• Right side:
  • Current liabilities:
    • Accounts payable: The amounts owed to supplier’s purchases made on credit
    • Notes payable and short-term debt: Loans that must be repaid in the next year, or repayment of long-term debt that will occur within the next year
    • Accrual items: Items such as salary or taxes that are owed but have not yet been paid, and deferred or unearned revenue
  • Long-term liabilities:
    • Long-term debt: A loan or debt obligation maturing in more than a year
  • Long-term debt: Book value of equity, net worth from an accounting perspective

The balance sheet identity states that the left and right sides must balance such that

$$\text{Assets}=\text{Liabilities}+\text{Stockholders’ Equity}$$

Purpose

The balance sheet shows the financial position of the firm at a specific point in time.

• a snapshot of the firm’s assets and liabilities  e.g., values as of Mar 31, 2015
• amounts measured at historical values and historical exchange rates
• Net Property, Plant, & Equipment
  • = Acquisition cost – Accumulated depreciation
  • = book value (carrying amount) of long-term assets
• Goodwill
  • Acquisition price paid for a company above its book value
  • Value of intangibles acquired by the firm