The Balance Sheet – how to read it?

    The Balance Sheet

    All public companies are mandated to provide a balance sheet as part of standard accounting procedures.  The balance sheet allows one to compare where money is coming from (liabilities), what it is being spent on (assets), and the accumulated value in the company (equity).  It states the net worth of the company by simply subtracting the liabilities from the assets.

    The balance sheet should always be in balance.

    Assets = Liabilities + Shareholder Equity

    So if you add together all the Liabilities and the Shareholder Equity it should always equal the value of the assets.

    Assets

    The assets of the company are split into current assets and longer term assets.

    Current Assets

    balance sheet example 1
    balance sheet example 1

    Apple Inc Balance Sheet 2007 to 2011

    Cash and equivalents are usually the amount of easily accessible cash in the bank

    Short term investments are any short term liquid investment the company has made.

    Trade Accounts receivable are usually any outstanding payments for products sold that are due to the company.

    Total inventory is important to watch as the figure shows if the company is building up costly stock that it cannot sell.

    Prepaid expenses show the amount of cash the company has invested in advance of receiving services.

    Other Assets

    Apple Inc Balance Sheet 2007 to 2011

    Longer term assets include buildings purchased, land owned and any machinery owned.  They are also depreciated over time.

    Good will is known as an intangible asset, this could be the inherent value of a brand, or the extra price paid whist buying a company that is above the book value of the business.

    Liabilities

    Liabilities are any outstanding debts or taxes owed by the company.

    Example Balance Sheet
    Example Balance Sheet

    Apple Inc Balance Sheet 2007 to 2011

    Accounts Payable are a listing of any debts that must be paid off within a given timeframe.

    Accrued expenses are the exact opposite of the prepaid expenses mentioned earlier, essentially any short term obligations that will be paid off in the near future.

    Deferred income tax is as you can imagine the taxes that are owned to the government or regions authorities but not yet paid.

    Shareholder Equity

    The shareholder equity is what is left when you subtract the liabilities (debts) from the assets.

    Apple Inc Balance Sheet 2007 to 2011

    Common stock is the par value of the stock.  So even though Apples actual stock price might be $500, this might be recorded as $1 par value per stock.  Meaning during liquidation you may only receive $1 per share you own.  You may be lucky to even receive that as the shareholders are the last to receive any payment, as creditors and bond holders have priority.

    Retained Earnings are the reinvested profits from the company taken from the Income statement.

    Book Value

    The book value of the company is derived from the balance sheet.  If essentially tells you what the company would be worth if you sold all the assets and paid off all the debts.

     

    Book Value  =  Total common shareholders’ equity / Average Number of common shares outstanding

    Apple has a shareholder equity of $76,615 million.

    Apple Inc has 935 million shares outstanding.

    So,  76,615 / 935 = a book value of $81 per share.  This data is from the 2011 end of year account.

    LEAVE A REPLY

    Please enter your comment!
    Please enter your name here