Investment Theory and Portfolio Development - Financial Statement Analysis

A company's financial statements consist of its balance sheet, a snap shot of its financial condition at a given point in time; and its income statement, a view of its financial activity over a specific time period. A company's balance sheet is prepared in accordance with the basic principals of double-entry bookkeeping.

This means that any changes on the asset side of the balance sheet need to have an offsetting change on the liability side in order for the balance sheet to balance.

The basic balance sheet formula reads as follows:

Formula
Assets = Liabilities + Equity or Assets - Liability = Equity.

A basic exhibit of the balance sheet follows:

Corporation Balance Sheet as of 31 December, XXXX
Assets Liabilities
Current Assets Current Liabilities
Cash and Equivalents - cash and money market instruments. Accounts Payable - sums owed to suppliers and other costs of doing business.
Accounts Receivable - amounts due from customers for the sale of goods and services adjusted for a bad debt allowance. Accrued Wages Payable - all manner of compensation owed (wages, salaries and commissions).
Inventory - cost of raw materials, work in progress and finished goods. Current Portion of Long Term Debt - that due within twelve months.
Prepaid Expenses - as yet not benefited from. These include rent, taxes, advertising, etc. Notes Payable - balance remaining on any borrowings
Fixed Assets-property, plant and equipment. Long Term Liabilities
Other Assets - intangibles such as formulas, goodwill (the company\'s value above its book value), contract rights. Funded debt - that due in five or more years. Mortgages, long term promissory notes, outstanding corporate bonds.


Ratio analysis: Liquidity Ratios


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