Probably the most comprehensive snapshot of a public company, the balance sheet provides a summary of company assets, liabilities, and stockholder’s equity. A good way to understand this is to think of an individual instead of a company. Your assets are what you “have” (e.g., money in the bank, your 401k, etc.) while liabilities are what you “owe” (outstanding loans, credit card debt, etc.). If you subtract the value of your liabilities from the value of your assets you (hopefully) have an amount leftover. This represents your “Net Worth”, and is essentially the same as “Stockholders’ Equity” on the balance sheet. The equation is:
Assets - Liabilities = Stockholders’ Equity
or, equivalently:
Assets = Liabilities + Stockholders’ Equity
Assets
Assets fall into two broad categories on the balance sheet: Current & Non-Current Assets. Current assets are more “liquid” assets that can be converted into cash or used in the near term, while non-current assets are longer term holdings such as investment property or equipment used in the manufacturing of products.
Current Assets
- Cash & Cash Equivalents: Typically, funds held in short term investments such as a money market account
- Short-Term Investments: Investments which take less than a year to reach maturity (bonds, etc.)
- Accounts Receivable (AR): AR represents sales which have been booked but not yet paid for with cash by customers
- Inventories: Includes products waiting to be sold as well as (especially in manufacturing firms) raw materials used to make products
- Other: Other assets such as “Pre-paid Expenses” which will benefit the company within the next year
Non-Current Assets
- Long-Term Investments: Investments in securities with greater than 1 year to maturity (as well as stocks)
- PP&E (Property, Plant, & Equipment): Land, factories, as well as equipment used in the manufacture of products
- The value of PP&E is adjusted to account for depreciation of the asset over time
- Intangible Assets: One example is “goodwill”, which represents the intangible value of brand recognition, etc.
Liabilities
Current Liabilities
- Short-Term Debt: Funds borrowed by the firm which are due in less than 1 year (e.g., a line of credit, etc.)
- Accounts Payable (AP): The flip side of AR (bills the company must pay for services rendered or goods)
Non-Current Liabilities
- Long-Term Debt: Funds the company has borrowed in the form of corporate bonds
Stockholders’ Equity
- Retained Earnings: Total profit of the firm since inception, minus dividends paid to investors
- Treasury Stock: Stock repurchased by the company from investors (repurchases are good for investors since they boost the Earnings Per Share of the company)