No. of Recommendations: 7
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 liabilities                    Stewart talks about non-interest
                                             bearing current liabilities
Total current liabilities                    (e.g. accounts payable), which
                                             is money that has no cost which
                                             can fund a business (what Warren
                                             Buffett calls "float").  The
                                             Rule Makers have the "flow ratio"
                                             which compares current
                                             liabilities to current assets.

Noncurrent liabilities                       The rest of debt is included
                                             here, as well as other
Deferred income taxes                        liabilities such as deferred
                                             income taxes and certain
Long-term debt                               benefits.

Other noncurrent liabilities

Total liabilities

Shareholder's Equity                       This number (also known as
                                             the "book value") is in theory
Preferred stock                              the liquidation value to
                                             shareholders after all liabilities
Common stock, at par value                   are paid off.  In practice it
                                             may be thought more of a measure
Additional paid in capital                   of what is "put into" a company
                                             than what may be "taken out".
Retained earnings
                                             Par value so far as I can tell
Treasury stock at cost                       is a completely irrelevant
                                             number.  Together with "paid in
Total shareholder's equity                   capital" it is a measure of how
                                             much equity was raised from its
Total liabilities and shareholder's equity   IPO or secondary offerings.

                                             Retained earnings is money kept
                                             to fuel the business.  Treasury
                                             stock is repurchased shares.

Note that all three statements convey important information.  They are
also interrelated.  For example, when a sale is booked it could have
three entries: sale amount (income statement), cash received (cash flow
statement) and accounts receivable (amount owing for sale not paid in cash).

Many "efficiency" ratios are based on some sort of asset measure.  Return
on assets, return on equity and return on invested capital all measure
cash production per dollar invested.  Days in inventory, days sales
outstanding and days payable outstanding measure how fast inventory,
receivables and payables respectively are turned over.  Cost of capital
is a measure of financing costs, real and implicit, for a company.
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