SCRIPT (BALANCE SHEET)

The term balance sheet refers to a financial statement that reports a company's assets, liabilities, and
shareholder equity at a specific point in time. Balance sheets provide the basis for computing rates of
return for investors and evaluating a company's capital structure. In other words, balance sheet is the
important way of how we will know the company’s strength and its capabilities.

In short, the balance sheet is a financial statement that provides a snapshot of what a company owns
and owes, as well as the amount invested by shareholders.

The balance sheet provides an overview of the state of a company's finances at a moment in time. 

The balance sheet adheres to the following accounting equation, with assets on one side, and liabilities
plus shareholder equity on the other, balance out

Assets=Liabilities+ Shareholders’ Equity

This formula is intuitive. That's because a company has to pay for all the things it owns (assets) by either
borrowing money (taking on liabilities) or taking it from investors (issuing shareholder equity).

The assets should always equal the liabilities and shareholder equity. This means that the balance sheet
should always balance, hence the name. If they don't balance, there may be some problems, including
incorrect or misplaced data, inventory or exchange rate errors, or miscalculations.

IMPORTANCE OF BALANCE SHEET

 Balance sheets determine risk. This financial statement lists everything a company owns
and all of its debt.
 Balance sheets are also used to secure capital. A company usually must provide a
balance sheet to a lender in order to secure a business loan. A company must also
usually provide a balance sheet to private investors when attempting to secure private
equity funding.
 Last, balance sheets can lure and retain talent. Employees usually prefer knowing their
jobs are secure and that the company they are working for is in good health. For public
companies that must disclose their balance sheet, this requirement gives employees a
chance to review how much cash the company has on hand, whether the company is
making smart decisions when managing debt, and whether they feel the company's
financial health is in line with what they expect from their employer.
 WHO PREPARES THE BALANCE SHEET
 Depending on the company, different parties may be responsible for preparing the
balance sheet. For small privately-held businesses, the balance sheet might be prepared
by the owner or by a company bookkeeper. For mid-size private firms, they might be
prepared internally and then looked over by an external accountant.
 Public companies, on the other hand, are required to obtain external audits by public
accountants, and must also ensure that their books are kept to a much higher standard.

LIMITATIONS OF BALANCE SHEET

 Although the balance sheet is an invaluable piece of information for investors and
analysts, there are some drawbacks. Because it is static, many financial ratios draw on
data included in both the balance sheet and the more dynamic income statement and
statement of cash flows to paint a fuller picture of what's going on with a company's
business.
 A balance sheet is limited due its narrow scope of timing. The financial statement only
captures the financial position of a company on a specific day.
 Different accounting systems and ways of dealing with depreciation and inventories will
also change the figures posted to a balance sheet.
 Last, a balance sheet is subject to several areas of professional judgement that may
materially impact the report. For example, accounts receivable must be continually
assessed for impairment and adjusted to reflect potential uncollectible accounts.
Without knowing which receivables a company is likely to actually receive, a company
must make estimates and reflect their best guess as part of the balance sheet.

Components of a Balance Sheet

Assets

-Accounts within this segment are listed from top to bottom in order of their liquidity. This is
the ease with which they can be converted into cash.

Here is the general order of accounts within current assets:

 Cash and cash equivalents are the most liquid assets and can include Treasury bills and
short-term certificates of deposit, as well as hard currency.
 Marketable securities are equity and debt securities for which there is a liquid market.
  Accounts receivable (AR) refer to money that customers owe the company. This may
include an allowance for doubtful accounts as some customers may not pay what they
owe.
 Inventory refers to any goods available for sale, valued at the lower of the cost or
market price.
 Prepaid expenses represent the value that has already been paid for, such as insurance,
advertising contracts, or rent.

Here are the long-term assets include the following:

 Long-term investments are securities that will not or cannot be liquidated in the next
year.
 Fixed assets include land, machinery, equipment, buildings, and other durable,
generally capital-intensive assets.
 Intangible assets include non-physical (but still valuable) assets such as intellectual
property and goodwill. These assets are generally only listed on the balance sheet if
they are acquired, rather than developed in-house. Their value may thus be wildly
understated (by not including a globally recognized logo, for example) or just as wildly
overstated.

Liabilities

A liability is any money that a company owes to outside parties, from bills it has to pay to
suppliers to interest on bonds issued to creditors to rent, utilities and salaries.

Current liabilities accounts might include:

 Current portion of long-term debt is the portion of a long-term debt due within the next 12
months. For example, if a company has a 10 years left on a loan to pay for its warehouse, 1 year
is a current liability and 9 years is a long-term liability.
 Interest payable is accumulated interest owed, often due as part of a past-due obligation such as
late remittance on property taxes.
 Earned and unearned premiums is similar to prepayments in that a company has received
money upfront, has not yet executed on their portion of an agreement, and must return
unearned cash if they fail to execute.

Long-term liabilities can include:

  Long-term debt includes any interest and principal on bonds issued
 Pension fund liability refers to the money a company is required to pay into its employees'
retirement accounts
 Deferred tax liability is the amount of taxes that accrued but will not be paid for another year.
Besides timing, this figure reconciles differences between requirements for financial reporting
and the way tax is assessed, such as depreciation calculations.

Shareholder Equity
Shareholder equity is the money attributable to the owners of a business or its shareholders. It is also
known as net assets since it is equivalent to the total assets of a company minus its liabilities or the debt
it owes to non-shareholders.

Additional paid-in capital or capital surplus represents the amount shareholders have invested in excess
of the common or preferred stock accounts, which are based on par value rather than market price.
Shareholder equity is not directly related to a company's market capitalization.

Example of a Balance Sheet

The image below is an example of a comparative balance sheet of Apple, Inc. This balance sheet
compares the financial position of the company as of September 2020 to the financial position of the
company from the year prior.

https://www.investopedia.com/thmb/BrJjdp7woVUp4c5Sf-9eoH3IQjc=/660x0/
filters:no_upscale():max_bytes(150000):strip_icc():format(webp)/phpdQXsCD-
3c3af916d04a4afaade345b53094231c.png

In this example, Apple's total assets of $323.8 billion is segregated towards the top of the report. This
asset section is broken into current assets and non-current assets, and each of these categories is
broken into more specific accounts. A brief review of Apple's assets shows that their cash on hand
decreased, yet their non-current assets increased.

This balance sheet also reports Apple's liabilities and equity, each with its own section in the lower half
of the report. The liabilities section is broken out similarly as the assets section, with current liabilities
and non-current liabilities reporting balances by account. The total shareholder's equity section reports
common stock value, retained earnings, and accumulated other comprehensive income. Apple's total
liabilities increased, total equity decreased, and the combination of the two reconcile to the company's
total assets.