The Balance Sheet and Its Analysis Chapter 5

Purpose and Use of a Balance Sheet A balance sheet is a systematic organization of everything “owned” and “owed” by a business or individual at a given time. Assets – anything of value owned by the business or individual Liability – any debt or other financial obligation Net Worth – the amount the owners have invested in the business

Balance Sheet Format Assets Current Assets Noncurrent Assets Liabilities Current Liabilities Noncurrent Liabilities Owner’s Equity

Asset Valuation and Related Problems A cost basis balance sheet is required when following basic accounting principles. It values all assets using the cost, cost less depreciation, or farm production cost methods. A market basis balance sheet would have all assets valued at market value less estimated selling costs.

Balance Sheet Example Asset Section Liability Section Owner Equity Section

Balance Sheet Analysis Analyzing Liquidity Current Ratio = Current Asset Value/Current Liability Value Working Capital = Current Assets – Current Liabilities

Balance Sheet Analysis Analyzing Solvency Debt/Asset Ratio = Total Liabilities/Total Assets Equity/Asset Ratio = Total Equity/Total Assets Debt/Equity Ratio = Total Liabilities/Owner Equity

Summary of Analysis MeasureMarket Basis Liquidity: Current Ratio Working Capital 1.27 $23,640 Solvency: Debt/Asset Ratio Equity/Asset Ratio Debt/Equity Ratio Ratios calculated from page76 -- Table 5-4