The Balance Sheet

The Balance Sheet Snapshot

The balance sheet is a financial photograph showing what a firm owns, owes, and leaves for owners at a single date. It always balances via $\text{Assets} = \text{Liabilities} + \text{Equity}$. Defintionally wrong if it fails.

Assets use two liquidity buckets:

• Current assets: cash or items converting within one year, ordered most liquid first.
• Non-current assets: long-lived resources, PP&E, and intangibles carried at cost minus net book value.

Liabilities use two timing buckets:

• Current liabilities: obligations due within one year.
• Non-current liabilities: obligations beyond one year.

Equity holds share capital, retained earnings (profits minus dividends), and reserves.

Golden Rule: The statement must always balance.

Reading the Skeleton

Read the balance sheet in fixed order: Size, Asset mix, and Financing mix. Compare mix against industry norms, as an airline's PP&E differs from a consultancy's receivables.

$$\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}} \qquad \text{Leverage} = \frac{\text{Total liabilities}}{\text{Total equity}}$$

Net working capital is current assets minus current liabilities. Negative working capital can work for supermarkets selling inventory before paying suppliers, but usually signals cash strain.

Retained earnings shows lifetime profit left inside. Large balances show self-financed growth.

Common pitfall: Comparing asset mixes across different industries. Always judge a firm against its peers.