Market Live brings in the Stock Market Tutorial which explains the basics of Fundamental Analysis. Whether it is about Reading Balance Sheets or about understanding the Cash Flow – Get all the fundamental analysis aspects being explained in a simple manner here.
The balance sheet statement is one among the most important financial documents of an organization. It thus becomes very important for every business owner or would be business owner to understand just what goes into this important document. By buying the shares of a company, you indeed own and invest in the company in some units. As a shareholder of a company, you are indeed one of the many similar small owners of the company. Thus it becomes very crucial for investors or prospective shareholders of a company to carefully analyze this important financial statement called the Balance Sheet.
A balance sheet is actually a snapshot of a business’ financial condition at a specific moment in time, usually at the close of an accounting period. More specifically, a Balance Sheet is a statement of those assets and liabilities of a business enterprise that can be given a value in terms of money; it shows both the assets and how the assets are financed.
- The present and potential stakeholders of the company,
- Creditors to the company such as the banks and money lenders,
- The Company’s Board of Directors, in their role as appointees of shareholders, monitoring the management’s actions.
- Financial analysts who closely track the financial health of the company,
- Economists and government regulatory agencies which use this information for a wide variety of financial statistics and also ponder over it to police the capital market system in general.
A balance sheet comprises assets, liabilities, and owners’ or stockholders’ equity.
Every balance sheet must include the name of the enterprise and the date to which the figures in the balance sheet refer.
The balance sheet is one of the financial statements of a company and needs to be supported by:
• The profit and loss account (income statement)
• The sources and uses of funds statement (funds flow statement)
• Notes to the financial statements
• The auditor’s certificate
Assets are the things that the business or company owns. Liabilities are what the company owes. The liabilities indicate what money has been made available to the enterprise, and from where.
The assets show how the enterprise has used the money made available to it.
Total assets must always equal total liabilities to creditors and shareholders.
Assets can further be grouped as :
- Current assets – examples of current assets include Cash, Accounts receivable, Inventory and merchandise, Prepaid rent, Prepaid Insurance etc
- Fixed assets – These are things that aren’t held for resale such as furniture and equipment, land and buildings.
Similarly, Liabilities can further be grouped as :
- Current liabilities – These are liabilities that are due within a year, such as accounts payable, short-term loans, overdrafts, taxes, and wages.
- Fixed liabilities or long-term liabilities – These are liabilities that are due for more than a year, such as the notes payable that have a five-year maturity.
Also, it has to be kept in mind that :
Assets = Liabilities + Owners’ Equity