The
balance sheet (also called the statement of financial position or
statement of financial condition) presents a company’s current financial
position by disclosing the resources the company controls (assets) and its sources
of capital (liabilities/equity) at a specific point in time.
In the balance sheet report, you’ll
see the Assets, Liabilities and Owners Equity. Those three are the basic
elements of the balance sheet.
Assets are resources controlled by
the company as a result of past events and from which future economic benefits
are expected to flow to the entity. This definition means that:
a. An asset is controlled by the company. Machines,
equipment, cash and vehicles are controlled by the company. Employees are not
considered assets because the company doesn’t control them.
b. An asset is a result of past events. It occurred already. It
happened already. The event giving rise to the entity’s right or control over
the asset has transpired already.
c. An asset is expected to provide future economic benefits to
the company. Future net cash flow is expected. Simply put, an asset is expected
to provide net cash flows in the future.
In Assets section, you’ll know which assets
are current or non-current.
Liabilities represent obligations of
a company arising from past events, the settlement of which is expected to
result in an outflow of economic benefits from the entity. This definition
means that:
a. It is an obligation. A duty. A responsibility. It provides
little or no discretion to avoid its settlement.
b. It came from past events. It occurred already. It transpired
already. It happened already.
c. It is expected to result in outflow of economic benefits.
It is a duty to transfer economic benefits (assets) to others at a future date.
Similar to Assets, the Liabilities section
will provide information which items are current and non-current.
Owner’s Equity is the owner’s residual
interest after deducting liabilities from the assets. It is normally compose of
Capital, Retained Earnings and Unrealized Gain or Loss.
The amounts of the items in the
balance sheet are the balances at a specific point in time. What is your bank
balance last December 31, 2012? The balance sheet will answer that question. Have
you notice that the date is always specific? It’s always like December 31,
2012, or March 31, 2012, or June 30, 2012 or September 30, 2012 or any specific
date you have in mind. Take a look at EEI’s balance sheet date. The date
specifically states it is December 31, 2012. That means that the item balances
are as of December 31, 2012 and December 31, 2011. In some financial statements,
you’ll see As of or As on before the date. It will be like As of December 31,
2012 or As on December 31, 2012. This As of or As on signifies the specific
date of the items in the balance sheet.
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■ Is the company capable on meeting its
short term obligations (liquidity), and has the ratios improved?
■ Does the company has sufficient resources
to cover its obligations (solvency)?
■ What is the company’s financial
position relative to the industry?
■ Does the company has enough resources
to declare dividends to shareholders?
Source: CFA
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