Balance Sheet Part 1

Quick reference

• 00:03 Hi. This is Ray Sheen.
• 00:05 Let's talk about balance sheets, again one of the fundamental financial statements.
• 00:10 This will be one of three modules on balance sheets, and
• 00:12 this will be an overview of the balance sheet.
• 00:16 >> The balance sheet looks like this.
• 00:18 Notice that it is set up with two sides.
• 00:20 One side represents what the company has and
• 00:23 the other side represents what the company owes to others.
• 00:26 The two sides are always equal.
• 00:28 That is they are balanced.
• 00:30 Hence the name balance sheet.
• 00:32 I'll go into some of the accounts in more detail on the next slide.
• 00:35 Let's put this statement into a personal context.
• 00:38 This is the net worth statement.
• 00:40 If you're like me, you visit with your financial advisor periodically and
• 00:44 he or she will discuss your current net worth.
• 00:47 What do you have?
• 00:48 A house, a car, a boat, investments?
• 00:50 And, what do you owe a mortgage, credit card bills, car loans?
• 00:56 The differences between those is your net worth.
• 00:59 Well, we see the same type of format here.
• 01:01 The left side is what the company has.
• 01:03 The upper right side is what the company owes to other companies or organizations.
• 01:08 And the lower right side is the difference,
• 01:10 the equity that represents the shareholders' value in the company.
• 01:14 The Balance Sheet can be used to determine the worth of a company.
• 01:18 The equity section represents that worth.
• 01:20 Now, a point of clarification.
• 01:22 This is the value of the company if the the company were to liquidate all assets,
• 01:26 pay all bills, and shut its doors forever.
• 01:29 This is not the value that would be the value on the stock market,
• 01:32 which is represented by the number of shares of stock and stock price.
• 01:36 This is usually a much higher number.
• 01:37 And as we all know, the stock price can vary greatly from day to day.
• 01:41 The reason the two values are different, is that the stock market
• 01:44 assumes the company will stay in business to make profits for many years to come.
• 01:49 The market has made an educated guess about the future value that
• 01:52 the company will create, and has factored that into the stock price.
• 01:56 The balance sheet represents a going out of business value.
• 01:59 It is the value if the company was shut down, the assets sold, and
• 02:02 the bills paid off.
• 02:05 Unlike the earnings statement, the balance sheet is calculated at a moment in time
• 02:09 rather than for a period of time.
• 02:11 It represents all financial transactions that have occurred in the business
• 02:15 from the time it was founded until the date of the report.
• 02:18 And makes no comments or commitments about the future.
• 02:21 The balance sheet is always balanced.
• 02:24 Another way of saying that is that if we subtract the value of the liabilities from
• 02:27 the value of the assets, we will get the value of the equity.
• 02:32 So let's look at the items in the balance sheet.
• 02:34 Keep in mind the structure is what you have equals what you owe.
• 02:39 This is with the understanding that, after you have payed any outside creditors,
• 02:43 what is owed to them, the remainder is what is owed to the business owners.
• 02:47 So, first, I'll describe the major categories of assets.
• 02:50 A company may choose to break these down into sub-categories when reporting,
• 02:54 in order to better explain corporate risks or actions taken.
• 02:58 The first three asset categories are often referred to as current assets.
• 03:02 This means that the financial community would consider them to either be cash or
• 03:06 easily converted to cash.
• 03:08 Of these three the easiest to understand is the first one, cash.
• 03:12 Although this category also includes cash equivalents
• 03:15 such as securities like stocks and bonds, they can be very easily converted to cash.
• 03:20 The next one is Accounts Receivable.
• 03:22 This is the name for money that is owed to the company for goods and
• 03:25 services that they have delivered but that the customer has not yet paid for.
• 03:30 This account doesn't exist in a business using the cash basis for accounting but
• 03:34 it does exist in a business using the accrual method of accounting.
• 03:37 The company is just waiting for the money to come in.
• 03:40 That old phrase, the check is in the mail, applies to this account.
• 03:45 The third current account is inventory.
• 03:47 This is the value of inventory that is intended for sale to a customer.
• 03:51 It includes both raw materials and finished goods.
• 03:54 The reason that this is a current asset is that the financial accounting practices
• 03:57 assumes that there's a ready buyer for all inventory.
• 04:00 And the other category of assets is fixed assets.
• 04:04 These are assets with long term value to the company.
• 04:07 They are normally land, buildings, and capital equipment.
• 04:10 These assets are entered into the balance sheet at their purchased value.
• 04:14 However, these assets have a tendency to wear out over time, so
• 04:18 there value is gradually decreased by the process of depreciation.
• 04:21 I'll talk more about that in another module.
• 04:24 Let's switch to the other side of the scales.
• 04:26 There are two primary categories, liabilities, and equity.
• 04:30 The liabilities include accounts payable.
• 04:32 This is similar to accounts receivable, only the roles are reversed.
• 04:36 Instead of the company waiting to be paid by customers, this account represents
• 04:40 the money that the company owes to its suppliers and that has not yet paid.
• 04:44 Again this account does not exist in a business using the cash
• 04:47 method of accounting.
• 04:48 But it does exist in those companies that use the accrual method.
• 04:52 The other liability category is debt, both short and long term.
• 04:56 The difference between those is that short term debt is negotiated to be paid off
• 05:00 within one year, and long term is multi year.
• 05:04 This is money owed to banks and money lenders.
• 05:07 The other two categories on this side of the balance sheet are equity accounts.
• 05:11 The first is the capitol stock that the investors paid into the company
• 05:14 in order to obtain shares in the company.
• 05:17 Whenever the company issues new stock, or
• 05:19 buys back stock, it changes the value of this account.
• 05:23 The final account is retained earnings.
• 05:25 This is exactly what the account name says it is.
• 05:28 When a customer has profits or
• 05:29 earnings, it often distributes a portion of those earnings to the shareholders.
• 05:33 But it also retains a portion of those earnings to invest back into the company.
• 05:38 This account represents the amount of reinvestment made by the company.
• 05:42 All of these accounts represent the financial status of the company
• 05:45 as of the date of the report.
• 05:50 >> Well that's the balance sheet.
• 05:52 It's a financial statement that shows the worth of the company.
• 05:56 It has everything that the company owns and
• 05:58 everything that the company owes to someone else.

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