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A balance sheet explains the financial position of a company at a specific point in time. As opposed to an income statement which reports financial information over a period of time, a balance sheet 12 things you need to know about financial statements is used to determine the health of a company on a specific day. If a company takes out a five-year, $4,000 loan from a bank, its assets (specifically, the cash account) will increase by $4,000. Its liabilities (specifically, the long-term debt account) will also increase by $4,000, balancing the two sides of the equation.

Since goodwill impairment is a value judgment, it is important to read the goodwill with notes section of the balance sheet. More details about the structure of the balance sheet and its relationship to the other financial statements can be found in the free CFI course on Reading Financial Statements. Accounts within this segment are listed from top to bottom in order of their liquidity. They are divided into current assets, which can be converted to cash in one year or less; and non-current or long-term assets, which cannot.

Are you interested in gaining a toolkit for making smarter financial decisions and communicating decisions to key stakeholders? Explore our online finance and accounting courses, and download our free course flowchart to determine which best aligns with your goals. To get a jumpstart on building your financial literacy, download our free Financial Terms Cheat Sheet. The balance sheet has four major sections – Assets, Liabilities, Shareholder’s Equity, and Notes.

How to Read a Balance Sheet

Generally Accepted Accounting Principles (GAAP) are guidelines that companies must follow when preparing financial statements. GAAP includes standards for things like recognition, measurement, and disclosure. GAAP can impact financial statements on how revenue is recognized and expenses are reported. Following GAAP ensures that financial statements are consistent and comparable. Third, management can manipulate financial statements to give a false impression of the company’s financial health.

1. For example, if a company takes on a bank loan to be paid off in 5-years, this account will include the portion of that loan due in the next year.
2. Without context, a comparative point, knowledge of its previous cash balance, and an understanding of industry operating demands, knowing how much cash on hand a company has yields limited value.
3. Since inventory requires a real investment of precious capital, companies will try to minimize the value of a stock for a given level of sales, or maximize the level of sales for a given level of inventory.
4. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.

The asset section is organized from current to non-current and broken down into two or three subcategories. This structure helps investors and creditors see what assets the company is investing in, being sold, and remain unchanged. Ratios like the current ratio are used to identify how leveraged a company is based on budget vs target its current resources and current obligations. The statement of financial position, also known as the balance sheet, is a financial statement that shows a company’s assets, liabilities, and equity at a specific point in time.

What Is Financial Analysis?

Continuing with the accounts receivable example, the quality of receivables can often be found in the notes to the balance sheet, which breaks down the receivables by age and credit quality. Some companies issue preferred stock, which will be listed separately from common stock under this section. Preferred stock is assigned an arbitrary par value (as is common stock, in some cases) that has no bearing on the market value of the shares. The common stock and preferred stock accounts are calculated by multiplying the par value by the number of shares issued.

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The applications vary slightly, but all ask for some personal background information. If you are new to HBS Online, you will be required to set up an account before starting an application for the program of your choice. 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.

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 accrued expenses turnover ratio higher standard. Balance sheets allow the user to get an at-a-glance view of the assets and liabilities of the company. 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.