Learn Balance sheet analysis example with basics information. The company balance sheet is called the statement of financial position that reveals the firm assets, liabilities, and owner’s equity. The balance sheet with the income statement and cash flow statement makes the cornerstone of any company's financial statements.
Working The balance sheet is divided into two parts based on the equation, Assets is equal to the Liabilities plus Shareholders' Equity. A balance sheet is used to operate the company balanced by a financial obligation with equity investment. They are brought into the company. The liabilities and equity of the sources that support the assets. The owners' equity means the shareholder’s equality in a publicly-traded company. It is important for the balance sheet to take a snapshot of the company's financial position at a single point.
Current Assets
They have a lifespan of one year or less to convert into cash. The asset classes include cash, cash equivalent accounts. The cash is called the fundamental current asset that includes non-restricted bank accounts and checks. They are safe assets and readily converted into cash.
Non-Current Assets :- They are not turned into cash which is expected to be turned into cash within a year. They refer to tangible assets like machinery, buildings, and land. The non-current assets can be intangible assets like patents.
The long term liabilities are debts and non-debt financial obligations. They are due after a period of one year from the date of the balance sheet. The current liabilities are the company's liabilities that will come within one year. It includes shorter-term borrowing as accounts payables along with the current portion of longer-term borrowing in the interest of a 10-year loan.
Shareholders' Equity
It is called the initial amount of money invested in a business. At the end of the fiscal year, it decides to reinvest net earnings into the company..
Fixed Assets Turnover Ratio:-The ratio is significant to the manufacturing industry compared to other industries. There is the purchase of property, plant & equipment in the manufacturing to get the required output.
Fixed Assets Turnover Ratio is equal to the Net sales divided by Average Fixed Assets
Current Assets :- The assets that are converted into cash within a year.
Current Ratio :- The liquidity ratio measures the ability of the company to pay off its short-term debts.
The formula for current ratio :- The current Ratio is equal to the Current Assets divided by Current Liabilities
The formula for quick ratio :- Quick Ratio is equal to the Quick Assets divided by Current Liabilities
Cash
The investors are attracted towards the company who has plenty of cash reported on their sheet. They offer security to the investors because it is used in tough times. The increasing cash year to year is a good sign but gets diminishing cash that can be considered as a sign of trouble. The reason for maintaining is the considerable amount as cash includes management lack of interest in investment opportunities. The cash flow analysis is done by the company to determine the source of cash generation and application.
Inventories
They are the finished goods that are accumulated by the company for selling them to customers. The investor will see how much money is tied up by the company in inventory to analyze the inventory company ratio. Inventory Turnover Ratio is equal to the Cost of goods sold divided by Average inventory
Accounts Receivable
It is the money due to the debtors of the firm. So by analyzing accounts receivable company analysis the speed at which amount is collected from the debtors. Calculated as Accounts Receivable Turnover Ratio equal to Net credit sales divided by Average accounts receivable
Equity
The amount of capital is contributed by the shareholders that are represented by the Equity called shareholder’s equity. The equity is calculated by subtracting total liabilities from the total assets. The Equity is equal to the Total Asset minus Total Liabilities
Example
In the Microsoft Inc. manufacturing concern reports the following items in the balance sheet. Total current assets have equal $10,000 + $6,000 + $11,000 + $3,000 = $30, 000, Quick assets = $10,000+ $11,000 = $21, 000, Total current liabilities = $8,000 + $7,000 = $15,000 and current ratio = $30,000/$15,000 = 2:1
