CFA Level 1
Financial Statements - Balance Sheet Basics
Within this section we'll define each asset and liability category on the balance sheet, and prepare a classified balance sheet
Balance Sheet Categories
The balance sheet provides information on what the company owns (its assets), what it owes (its liabilities) and the value of the business to its stockholders (the shareholders' equity) as of a specific date.
Total Assets = Total Liabilities + Shareholders' Equity
- Assets are economic resources that are expected to produce economic benefits for their owner.
- Liabilities are obligations the company has to outside parties. Liabilities represent others' rights to the company's money or services. Examples include bank loans, debts to suppliers and debts to employees.
- Shareholders' equity is the value of a business to its owners after all of its obligations have been met. This net worth belongs to the owners. Shareholders' equity generally reflects the amount of capital the owners have invested, plus any profits generated that were subsequently reinvested in the company.
Components of Total Assets on the balance sheet are listed in order of liquidity and maturity.
Balance Sheet Presentation Formats
Although there are no required reporting balance sheet designs there are two customary formats that are used, the account format and the report format. The two formats follow the accounting equation by subtotaling assets and showing that they equal the combination of liabilities and shareholder's equity. However, the report format presents the categories in one vertical column, while the report format places assets in one column on the left hand side and places liabilities and shareholder's equity on the right. Both formats can be collapsed further into a classified balance sheet that subtotals and shows only similar categories such as current assets, noncurrent assets, current liabilities, noncurrent liabilities, etc.