Question

What is the balance sheet, and what information does it provide? How is the order in which items are shown on the balance sheet determined? Explain in words the difference between net working capital and net operating working capital. Explain in words the difference between total debt and total liabilities.

Answer 1

BALANCE SHEET:
It is a statement of the financial position of a firm/company as on a particular date(mostly at the end of financial year). It provides information about all assets/liabilites that the company holds and uses to carry on its business.
All items in the balance sheet are arranged in the order of liquidity(Ability to sell). Basically the least liquid item is placed at the top followed by the highly liquid item in the bottom. Genarally, owners equity is the starting item on the liabilities side of a balance sheet and current liabilities are the bottom item.
On the assets side, Fixed assets generally are at the top and cash and cash equivalents are at the bottom.
Net working capital is determined by Current assets - Current liabilities. It is used to measure the liquidity of the company at any given point in time.
Net operating working capital is determined by Long term assets - Long term liabilities. It focuses in the long term prospective of the company rather than the shorter term.
The basic difference between the the two of the above is the perspective they offer. One is used in the short term and the other in the long term.
Total debt and total liabilites generally are used interchangeably and differ as per the perspective of the user. To be more specific, debt means the formal written arragements made by the company with their borrowers and liabilities mean the expenses, payments the comoany need to make in the due course of running its business.