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How to read a balance sheetKnowing how to read a balance sheet is essential to making wise investment decisions, as well as knowing the financial stability of companies. So what should a balance sheet tell you?
Why should you know how to read it? How to read a balance sheet: So you will see a section titled assets, and a section titles liability, and a section titled shareholders' equity. For the balance sheet to be accurate the amount of the shareholders' equity plus the liability must be the same as assets. If this is off something is not right. So, to be able to read a balance sheet you need to understand the components assets, liabilities, and shareholders' equity. So let's take a closer look at each of these: Assets are what a company uses to operate its business. To read a balance sheet correctly you need to know the types of assets and liabilities it represents. - Current Assets: By definition these are assets that have been around one year or less, meaning they can be converted easily into cash. This would mean things like actual cash being held by the company, accounts receivable, and any inventory the company current has. So, this means hard cash, or things equivalent to that, such as bonds, as well as any money owed by customers who purchased on credit, and the actual goods at the location. Liabilities that you see on a balance sheet are the financial obligations a company owes to outside parties. So, these can be short and long term debts, including accounts payables, and loans with interest. Last but not least, shareholders' equity is the initial amount of money invested into a business. So, in other words, when you look at a balance sheet this is just one line with numbers. If at the end of the year, a company decides to reinvest its net earnings into the company, these retained earnings will be transferred from the income statement onto the balance sheet 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. Now you know how to read it, have at it! |
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