A balance sheet summarizes a company’s financial position as of a specific date. It includes a listing of all the things the company owns (assets), the sum of its debts and liabilities, and its owner’s equity. Using the income statement and balance sheet together, it’s possible to calculate many different metrics that help evaluate a company’s performance and profitability.
In the first section of the balance sheet, you’ll see the assets, including items that can quickly be turned into cash such as accounts receivable and inventory. Fixed assets are also a part of this category, along with long-term investments and intangible assets like patents and trademarks. The next section lists the company’s liabilities, which include amounts owed to vendors and other creditors and payments for long-term projects such as pensions and mortgages. The final section is reserved for Shareholders’ Equity, which represents the money that shareholders have invested in the business. In a public company, this would be listed as common stock.
The balance sheet is important because it gives investors and creditors a snapshot of a company’s financial condition. For example, if current assets are greater than current liabilities, it’s an indication that the company has enough liquid resources to cover its short-term obligations. In contrast, if current liabilities are higher than current assets, it could indicate a need for more capital or a high level of financial risk. The balance sheet is also used to calculate financial ratios, such as the working capital cycle and asset turnover ratio. Bilanz