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.
(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
- 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)