“Let the improvement of yourself keep you so busy that you have no time to criticize others.” ― Roy T. Bennett

BALANCE SHEET SATURDAYS

There are three types of financial statements(Income Statement, Balance Sheet, & Statement of Cash Flows) produced by a company of which to use to aid in your valuation of that company. This post will focus on the Balance Sheet.

A balance sheet provides information on a company’s assets, liabilities, and equity. Today I will focus on the Current Assets section of a company’s balance sheet.

Assets are things that the company owns, and these assets can either be current or non-current. Current assets are liquid, meaning that they can easily be converted into cash. For example, a company’s inventory or checking accounts are considered current assets. If you’ve assumed by now that non-current assets are non-liquid you would be correct. Some non-current assets could be real estate that the company owns or any patents or trademarks owned by the company, just to name a few things.

Current Assets

 (Company’s cash or any assets they plan to convert to cash within 12 months)

  • Cash- There are several types of cash accounts
    • Merchant Account: This account holds all the deposits made from the company which processes the credit card payments made by customers.
    • Payroll Account: This account is used to pay employees
    • Operating Checking Account: The deposits in this account are used to pay company bills and handle business operations.
    • Petty Cash Account: This cash is used to pay for the company’s small daily expenses.
    • Sweep Account: This account is used to house any left over money after companies operating expenses are handled. This cash is used for investments in a pool with other companies and is ‘swept’ back in operating account as needed.
  • Short-Term Investments
    • Stocks- these are equity securities which a company can purchase and sell in the short-term for a profit.
    • Bonds- these are debt securities that a company can purchase to sell in the short-term for a profit.
  • Accounts Receivable
    • This is the amount of money owed to a company by customers who have purchased merchandise or received a service from them, that the customer has not yet paid for.
  • Notes Receivable
    • This is a short-term debt that someone owes the company.
    • There are three major components:
      • Principal: Amount owed to company
      • Rate: Amount of interest the debtor pays on the principal
      • Time: Time period debtor has to pay back the note
  • Inventory
    • Retail Inventory- Goods the company purchases from manufacturers for resale.
    • Manufacturing Inventory
    • Direct Material Inventory- raw materials the company owns to make products
    • Work-In-Process Inventory- Items that are in process but are not yet complete at the end of the financial period
    • Finished Goods- Cost of the completely processed item
  • Pre-Paid Expenses
    • Expenses that the company pays before they are due. For example, a company may make a year’s commercial real estate insurance payments all at once.

LET’S BUILD OUR FINANCIAL LITERACY ONE STEP AT A TIME!!!!

(Maire Loughran, 2011)

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