Question

In your own word Discuss the purpose of the balance sheet and the elements that exist within a classified balance sheet. Also, present some of the ways that financial statement analysis of the balance sheet can be used to assess the performance of a company

Answer 1

A Entity's balance sheet, also known as a "statement of financial position,"

Equation of Balance sheet

ASSETS =SHAREHOLDER’S WORTH(OWNER ‘SEQUITY) +LIABILITIES

What are assets, liabilities and owner ‘s Equity

1. Assets are what a company uses to operate its business,

2. while its liabilities and equity are two sources that support these assets

3. . Owners' equity, referred to as shareholders' equity, in a publicly traded company, is the amount of money initially invested into the company plus any retained earnings, and it represents a source of funding for the business.

It is important to note that a balance sheet is a snapshot of the company's financial position at a single point in time.

Elements that exist in a classified Balance sheet

One side of the balance sheet are the liabilities.

1. These are the financial obligations a company owes to outside parties. Like assets, they can be both current and long-term. Long-term liabilities are debts and other non-debt financial obligations, which are due after a period of at least one year from the date of the balance sheet.

2. Current liabilities are the company's liabilities that will come due, or must be paid, within one year. This includes both shorter-term borrowings, such as accounts payables, along with the current portion of longer-term borrowing, such as the latest interest payment on a 10-year loan.

Shareholders' Equity

Shareholders' equity is the initial amount of money invested in a business. If at the end of the fiscal year, a company decides to reinvest its net earnings into the company (after taxes), these retained earnings will be transferred from the income statement onto the balance sheet and into the shareholder's equity account. This account represents a company's total net worth. In order for the balance sheet to balance, total assets on one side have to equal total liabilities plus shareholders' equity

on the other side we have assets

1. Current Assets

2. Current assets have a lifespan of one year or less, meaning they can be converted easily into cash. Such asset classes include cash and cash equivalents, accounts receivable and inventory. Cash, the most fundamental of current assets, also includes non-restricted bank accounts and checks. Cash equivalents are very safe assets that can be readily converted into cash; U.S. Treasuries are one such example. Accounts receivables consist of the short-term obligations owed to the company by its clients. Companies often sell products or services to customers on credit; these obligations are held in the current assets account until they are paid off by the clients.

3. Lastly, inventory represents the company's raw materials, work-in-progress goods and finished goods. Depending on the company, the exact makeup of the inventory account will differ. For example, a manufacturing firm will carry a large number of raw materials, while a retail firm carries none. The makeup of a retailer's inventory typically consists of goods purchased from manufacturers and wholesalers.

Non-Current Assets

4. Non-current assets are assets that are not turned into cash easily, are expected to be turned into cash within a year, and/or have a lifespan of more than a year. They can refer to tangible assets, such as machinery, computers, buildings and land. Non-current assets also can be intangible assets, such as goodwill, patents or copyright. While these assets are not physical in nature, they are often the resources that can make or break a company – the value of a brand name, for instance, should not be underestimated.

5. Depreciation is calculated and deducted from most of these assets, which represents the economic cost of the asset over its useful life.

. some of the ways that financial statement analysis of the balance sheet can be used to assess the performance of a company

A company’s financial conditions are of a major concern to investors and creditors. As sources of finance for your company operations, investors and creditors rely on financial reports to gauge conditions for both the safety and profitability of their investments. More specifically, investors and creditors need to know where their money went and where it is now.

Your financial balance sheet addresses such issues by providing detailed information about the company’s asset investments. The balance sheet also lists a company’s outstanding debt and equity components, and so debt and equity investors can better understand their relative positions in a company’s capital mix.

Reporting on Operating Results

Financial conditions shown on the balance sheet are snapshots of a company’s assets, liabilities and equity at the end of a financial reporting period; they don’t reveal what happened during the period from operations that may have caused changes to financial conditions. Therefore, operating results during the period also concerns investors. The financial statement of income statement reports operating results such as sales, expenses and profits or losses. Using the income statement, investors can both evaluate a company’s past income performance and assess the uncertainty of future cash flows.

Statement of Shareholders’ Equity

The statement of shareholders’ equity is especially important to equity investors because it shows the changes in various equity components, including retained earnings, during a period. The amount of shareholders’ equity is a company’s total assets minus its total liabilities, representing the company’s net worth. A steady growth in a company’s shareholders’ equity by way of increasing retained earnings, as opposed to expanding shareholder base, means the accumulation of investment returns for current equity shareholders.