Chapter 14: Problem 13

What does a balance sheet show?

Short Answer

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A balance sheet is a financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time. It provides a snapshot of the company's financial position and is based on the fundamental accounting equation: Assets = Liabilities + Shareholders' Equity. Assets are categorized into current and non-current, and liabilities are also divided into current and non-current. Shareholders' equity represents the residual interest in the company after all liabilities have been paid off. The purpose of a balance sheet is to give an overview of the company's financial health and help stakeholders make informed decisions about its financial performance and risk.

Step by step solution

Introduction

A balance sheet is a financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a given point in time. The balance sheet shows what the company owns and owes, and the amount invested by shareholders. It provides a snapshot of the company's financial position and is based on the fundamental accounting equation: Assets = Liabilities + Shareholders' Equity.

Assets

Assets are everything the company owns that has financial value. They are categorized into two types: current and non-current. Current assets include cash, accounts receivable, inventory, and other items that can be quickly turned into cash or consumed within a year. Non-current assets, also known as long-term assets, include property, plant, equipment, and investments that are expected to provide value for more than one year.

Liabilities

Liabilities represent the company's debts and obligations. Like assets, they are also categorized into current and non-current. Current liabilities are obligations due within a year, such as accounts payable, short-term loans, and taxes payable. Non-current liabilities, also known as long-term liabilities, include long-term debt, deferred tax liabilities, and other financial obligations that extend beyond one year.

Shareholders' Equity

Shareholders' equity, also known as owners' equity or stockholders' equity, represents the residual interest in the company's assets after all liabilities have been paid off. It consists of common stock, retained earnings, and other components. Shareholders' equity shows the net worth of the company, which is the amount that shareholders would receive if all assets were liquidated and all liabilities were paid off.

Key takeaway

In summary, a balance sheet presents a company's financial position at a specific point in time by showing its assets, liabilities, and shareholders' equity. The balance sheet's primary purpose is to give an overview of the company's financial health and help stakeholders make informed decisions about the company's financial performance and risk.