 The
Balance Sheet - Assets
The
Balance Sheet shows on the
left-hand side is the firm's assets or how much money the
company has, while the
right-hand side is the firm's liabilities and equity or
how much it owes, and what is left for the
stockholders.
The
Balance Sheet shows you the
value of the stuff the company owns, the amount of debt,
how much inventory is in the corporate warehouse, and
how much money the business has to work with in the
short term. It is generally
the first report you want to look at when valuing a
company.
Every
balance sheet is divided into three main parts - assets,
liabilities, and shareholder equity.
The
difference in assets and liabilities is the net worth of
the firm, also called stockholders’ equity.
Assets
are anything that has value.
Your house, car, checking account, and the antique china
set your grandma gave you are all assets. Companies
figure up the dollar value of everything they own and
put it under the asset side of the balance sheet.
The
first thing under the asset column on the balance sheet
is something called "current asset". This is where
companies list all of the stuff that can be converted
into cash in a short period of time (usually a year or
less). Because these assets are easily turned into cash,
they are sometimes referred to as "liquid". They
normally consist of: -
Cash
and Cash Equivalents
is the amount of money the company has in hand or bank accounts,
certificates of deposit (CDs), and money market
funds. It tells you how much money is available to the
business immediately. How much should a company keep on
the balance sheet? General speaking, the more cash on
hand the better. Only cash can be represents actual
money, and it give management the ability to pay dividends and repurchase
shares in short period of time.
There
are some cases where cash on the balance sheet isn't
necessarily a good thing. If a company is not able to
generate enough profits for their financial year, they may
go to a
bank or other financial institution then borrow money. The money sitting on the balance
sheet as cash may actually be borrowed money. To find
out, you are going to have to look at the amount of debt
a company has. You probably won't be able to tell if a
company is weak based on cash alone; the amount of debt
is far more important.
Account
Receivables this
is money that is owed to a company but its customers.
While accounts receivable are good, they can bring
serious problems to a business if they aren't handled
properly.
Inventories
consists of merchandise a business owns but has not
sold. It is defined as a current assets because
all the inventory can be sold in coming month, then turning it into cash
easily. When looking at a
company's current assets, you need to pay special
attention on it.
In
the course of every day operations, businesses will have
to pay for goods or services before they actually
receive the product. If a jewelry store moved into your
neighborhood mall, it would most likely have to sign a
rent agreement and pay six to twelve months' rent in
advance. If the monthly rent was $2,000 and the business
prepaid for six months in advance, they would put $12,000 on
the balance sheet under Prepaid Expenses ($2,000
monthly rent X 6 months = $12,000). Each month, they
would deduct 1/6 from the prepaid expenses until the
six months period, at which point, the amount would
be $0. The other prepaid expenses as such like taxes,
salaries, utility bills, or the interest on their debt.
Long-term
Assets
these are the things that a business owns but cannot be
used to fund day-to-day operations.
Long-term
Investment and Funds
are investments a company intends to hold for more than
one year. They can consist of stocks and bonds of other
companies, real estate, and cash that has been set aside
for a specific purpose or project. In addition to
investments a company plans to hold for an extended
period of time.
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