1. Financial Statements: The Balance Sheet
Ryan Holliday ‘14
Colgate Finance Club
4/3/2011

2. Balance Sheet
Assets: what the enterprise has today Liabilities: how much the enterprise owes today Equity: what the enterprise is worth today Assets – Liabilities = Worth “Have” – “Owe” = “Value to owners” Assets = Liabilities + Worth *Must always balance out

3. Balance Sheet Continued
Found in a public company’s 10-k report
The specific accounts on balance sheets will vary by company and industry
Look at statements from the past 5-10 years, they will tell you much more than just looking at a single year

4. Assets Everything that you own (cash, inventory, machines, etc.)
Grouped by different characteristics:
Very liquid assets – cash and securities
Assets for sale – inventory
Productive assets – plant and machinery

5. Asset Section of Balance Sheet

6. Current Assets
Assets that are expected to be converted into cash in less than 12 months
Listed in order of liquidity

7. Cash
Most liquid asset
If you write a check to pay a bill, money will be taken out of this category

8. Accounts Receivable
When a company ships a product to the customer on credit, the company gains the right to collect money from that customer within a specified time in the future
Commonly given 30 or 60 days to pay

9. Inventory
Finished products ready for sale and materials to be made into products
As finished goods are sold, they become accounts receivable and then cash once the customer pays

10. Prepaid Expenses
Bills paid for services that have not yet been received (prepaid insurance payments, deposits paid to the telephone company, etc.)
Current assets because the enterprise will not have to use cash to pay for them in the future. They have already been paid for.

11. Other Assets
Assets that cannot be classified into “current asset” or “fixed asset” categories
Ex: brand name, patent, copyright

12. Fixed Assets at Cost
Productive assets that will be used over and over again in the production of the product
Ex: land, buildings, machinery, etc.
Reported at original purchase price

13. Accumulated Depreciation
Records the decline in value of fixed assets due to wear and tear from use and time
Sum of all depreciation charges since the asset was first purchased

14. Net Fixed Assets
= Fixed Assets – Accumulated Depreciation

15. Liabilities & Equity Liabilities – obligations of the company
Ex: money owed to lenders, suppliers, employees
Shareholders’ equity – value of the company that belongs to its owners

16. Liabilities & Equity of Balance Sheet

17. Current Liabilities Bills that must be paid within 12 months
Grouped depending on to whom the debt is owed

18. Accounts Payable
Bills, typically to other companies for products bought on credit, that the company must pay soon
Payment terms are typically 30 or 60 days, sometimes with a discount for early payment

19. Accrued Expenses Monetary obligations similar to accounts payable
ex: salaries not yet paid to employees, lawyer
bills not yet paid

20. Current Portion of Debt
Money owed within the next 12 months
Includes portion of long-term debt that is due within 12 months

21. Income Taxes Payable
Income taxes from sales that the company owes the government but has not paid

22. Capital Stock
Amount of money raised through issuing equity, includes common and preferred stock

23. Retained Earnings
Profits that have not been returned to the shareholders as dividends

24. Shareholders’ Equity
Sum of the investment in stock of the company plus profits less dividends paid out
Increases when the company (1) makes a profit, or (2) sells new stock

25. Ratio Analysis Indicators of: Liquidity Current, Quick, Cash Ratios
Asset Management
Inventory Turn, Asset Turn Ratio
Profitability
ROA, ROE
Leverage
Debt-to-Equity, Debt Ratio

26. Current Ratio = Current Assets Current Liabilities
Measures if current assets are sufficient to pay current liabilities
Higher the ratio, the more liquid the company is and the greater its ability to pay current liabilities when they come due

27. Quick Ratio = Cash+Receivables Current Liabilities
More conservative than the Current Ratio
Measures the ratio of “quick assets” to current liabilities, leaves out inventory

28. Cash Ratio = Cash+Cash Equivalents Current Liabilities
More conservative than the Quick Ratio
Looks at only the most liquid current assets

29. Inventory Turn = Cost of Goods Sold Inventory
Measures the volume of business that can be conducted with a given investment in inventory
If sales slow down, inventory can balloon and the inventory turn will decrease, a sign of trouble

30. Asset Turn Ratio = Annual Sales Assets
Measures the sales volume that a company can support with a given level of assets
Companies with low asset turns will require a large amount of capital to generate more sales

31. Return on Assets= Net Income Total Assets
Return of Assets (ROA)
Return on Assets= Net Income Total Assets
Measures management’s success in employing the company’s assets to generate profits

32. Return on Equity= Net Income Shareholders ′ Equity
Return of Equity (ROE)
Return on Equity= Net Income Shareholders ′ Equity
Measures management’s success in maximizing return on the owners’ investment
Companies that show high ROE usually benefit from a competitive advantage
Also called “Return on Investment” (ROI)

33. Debt to Equity Ratio= Current+Long−Term Debt Shareholders ′ Equity
Shows how much debt the company has relative to its investor equity
A company with a competitive advantage will be using its earning power to finance its operations and should show a low ratio (below .80)

34. Debt Ratio= Current+Long−Term Debt Total Assets
Measures the amount of debt relative to the total assets
Varies based on industry (auto tends to have higher ratios)

35. Bibliography
Ittelson, Thomas R. Financial Statements: a Step-by-step Guide to Understanding and Creating Financial Reports. Franklin Lakes, NJ: Career, Print. Investopedia.com