The Balance Sheet
The balance sheet is simply a picture of a company's assets and liabilities at a specific point in time. It is similar to a net worth statement for an individual, except that the "net worth" is referred to as "shareholders' equity."

For a business, the following formula applies:


Shareholders\' Equity = Total Assets - Total Liabilities


Assets fall into three categories:

  • Current - includes cash, marketable securities, accounts receivable and inventories

  • Fixed - refers to items owned and used by the company, such as real estate, equipment and furniture. The value used on the balance sheet is the original cost minus depreciation taken in previous years.

  • Intangibles- these are the non-physical components of the business's value, such as patents, copyrights, trademarks, franchises and goodwill.

Liabilities are defined as either current or long term.

  • Current liabilities - amounts that must be paid within a year and include:
    • Accounts payable
    • Notes payable
    • Taxes payable
    • Interest payable
    • Dividends payable

  • Long-term liabilities - amounts that become payable more than one year into the future and generally includebonds and long-term bank loans.

The key calculation derived from a company's balance sheet is working capital, which is obtained by subtracting current liabilities from current assets:


Working Capital = Current Assets - Current Liabilities



Look Out!
Working capital is not affected when a company buys securities with cash, since current assets include both cash and securities. A typical exam question will offer that scenario and then ask which balance sheet items are affected. Working capital will be an incorrect answer.


Shareholders' Equity
includes three components:

  • Common and preferred stock - on the balance sheet, only the par value of both classes of stock is used, not the market value. (Par value is a dollar amount assigned to a security when first issued. For stocks, par value usually is a small amount that bears no relationship to its market price.) This par value is multiplied by the number of outstanding shares.

  • Capital surplus- this refers to the premium that shareholders pay in excess of the par value, usually when stock is issued by a company. Also called paid-in surplus.

  • Retained earnings - these are the net profits the company retains for future use rather than pay out as dividends.


Exam Tips and Tricks
You can expect only one or two questions on financial
statements, such as:

XYZ Corporation buys furniture for a new addition onto its headquarters. Which of these items on its balance sheet will be affected?

Current Assets

  • Current Liabilities
  • Net Worth
  • Working Capital
    1. I and III
    2. I and IV
    3. II and III
    4. All of the above


    The correct answer is "b", since cash (a current asset) will decrease, this also decreases working capital. Furthermore, furniture is a fixed asset, not a current asset; and net worth is only affected by profit, loss or dividend payout.



    Time Value of Money

    Related Articles
    1. Investing

      Reviewing Liabilities On The Balance Sheet

      As an experienced or new analyst, liabilities tell a deep story of how a company finances, plans and accounts for money it will need to pay at a future date.
    2. Investing

      Breaking Down The Balance Sheet

      Knowing what the company's financial statements mean will help you to analyze your investments.
    3. Investing

      Current Liabilities

      Current Liabilities are company debts due within one year or one operating cycle, whichever is greater. An operating cycle is the time it takes a company to purchase inventory and convert it ...
    4. Investing

      How To Read Apple's Balance Sheet

      We explain how to find, read, and analyze a balance sheet from Apple.
    5. Investing

      Understanding Total Liabilities

      Total liabilities are the combined debts an individual or company owes.
    6. Personal Finance

      How To Improve Net Worth By Decreasing Liabilities

      Here's an analysis of how to adjust liabilities and assets to improve net worth.
    7. Investing

      How Dividends Affect Stockholders' Equity

      Find out how dividends affect a company's stockholders' equity and how the accounting process changes based on the type of dividend issued.
    8. Investing

      How to Analyze a Company's Financial Position

      Find out how to calculate important ratios and compare them to market value.
    Frequently Asked Questions
    1. Who is eligible for Canada Pension Plan benefits?

      Learn more about the Canada Pension Plan, who contributes to the plan and who can receive standard, disability, early retirement ...
    2. Who are Monsanto's main competitors?

      Learn about Monsanto Company's two main operating divisions and its main competitors within each sector, including The Mosaic ...
    3. What is an assumable mortgage?

      The purchase of a home is a very expensive undertaking and usually requires some form of financing to make the purchase possible. ...
    4. Do I have to complete all exams within a certain period of time to receive the CFA charter?

      According to the CFA Institute, a candidate can take as much time as necessary to complete all three levels of the CFA program.Therefore, ...
    Trading Center