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Learning to Invest / Reading Financial Statements


Subject:  Balance Sheet (FAQ v. 0.2) Date:  5/24/2000  1:49 AM
Author:  jmls Number:  1097 of 3955

Dear y'all,

This is the "Balance Sheet" section of the latest "Reading Financial
Statements" FAQ.  As always, any suggestions are appreciated.  Hope y'all
find it useful.


Lleweilun Smith

Q.  What is the format of a balance sheet?

A.  The Balance Sheet, also known as "Statement of Condition",
"Consolidated Statement of Financial Position" etc., consists of two
parts, "assets" and "liabilities and shareholder's equity".  Always the
total is the same on both sides; assets = liabilities + shareholder's
equity.  Usually only two years worth of information are included
(unlike the other statements).  Bennett Stewart's The Quest for Value
suggests thinking in terms of "operating" (asset side) and "financing"
(liability side), since "assets" include things like property and
inventories (stuff used to run a company) and liabilities include debt
and equity (stuff used to pay for a company).

Assets                                      This is the "operations"
                                             side; stuff that runs a company
                                             is here.

Current Assets:                              "Current" assets are in theory
                                             things which are easy to
Cash and cash equivalents                    liquidate.  This includes
                                             cash and short-term securities,
Marketable securities                        marketable securities, accounts
                                             receivable and inventories.
Accounts receivable                          For companies with much
                                             inventory "last in first out"
Inventories                                  (LIFO) vs. "first in first out"

                                             (FIFO) valuation may be
Total current assets                         important.  True liquidation
                                             value may be rather different
                                             than that stated here.

Property plant and equipment                 PP&E may include land, equipment
                                             and machinery.  The value on the
Less accumulated depreciation                books may overstate or understate
                                             true liquidation value.

Other assets                                 This may include anything from
                                             royalties to brand name to
Intangible assets                            "goodwill", the amount in excess
                                             of market value paid for a
Less accumulated goodwill                    bought company.  Estimating this
                                             true value is difficult,
Total Assets                                especially for companies which
                                             rely on R&D or brand name.

Liabilities and Shareholder's Equity     This is the "financing" side;
                                             stuff that pays for a company's
                                             operations are here.

Current liabilities                          This includes accounts payable,
                                             short-term and current part of
Accounts payable                             long-term debt, dividends,
                                             income taxes and some other
Short-term debt                              accrued liabilities (e.g.
                                             payroll).  At the very least
Dividends payable                            a company should be able to
                                             easily "pay for" current
Current portion of income taxes              liabilities.

Other accrued liabi