Components of balance sheet
Liabilites + Equities
Assets and liabilities changes
Assets and liabilities change due to business transactions.
Assets are added, when a company buys a building.
Likewise, when they issue notes payable(IOU), liabilities increases.
Revenue reported before cash is received.
This is an asset.
Cash received before revenue is reported. This is a liability.
Examples: Magazine subscriptions received from customers.
Expenses report but cash is yet to be paid. This is a liability.
Examples: Interest to be paid, wages payable.
Expenses paid but not yet reported (Invoices not received). This is an asset.
Prepaid rent, Prepaid insurance.
Typical assets disclosed on Balance sheet
1. Cash and its equivalents.
2. Accounts Receivable.
4. Prepaid expenses.
5. Deferred tax assets.
6. Financial assets.
7. Property plants Equipments.
8. Natural resource assets.
9. Intangible assets.
10. Assets held for sale.
Funds were raised to acquire the assets.
Items in Liabilities
1. Bank borrowing.
2. Trade payables.
3. Unearned revenues.
4. Accrued liabilities.
5. Deferred tax liabilities.
Equity information in the balance sheet
Earnings retained by the company
Parent shareholder's equity
Issued capital and paid in capital to equityholders.
Different formats of a balance sheet
1. Report format.
2. Account format (Similar to GL With assets on the left)
3. Classified format (Grouping the items)
Current assets - Current liabilities.
Fair value vs Historical cost
Fair value -> The current market value of an asset / liability
Historical value -> Market value at the time of acquisition.
Net Realizable Value
Estimated Selling price - Estimated costs to produce the goods - Costs required to do the sale
LIFO vs FIFO
LIFO now allowed in IFRS
FIFO is allowed in GAAP and IFRS.
Long term assets with physical substance in the company's operations. These are carried out at historical cost less accumulated depreciation.
Present value of excess return that a company can earn.
Types of goodwill
A financial instrument for which the value is derived based on some underlying factor.
Mark to market
Assets and liabilities, where the financial instruments are determined with the current market value.
Assets - Liabilities
Components of equity
1. Capital contributed by owners.
2. Minority interest.
3. Retained earnings.
4. Treasury stock.
5. Accumulated comprehensive income.
Different types of counting shares
1. Authorized. -> Total number of shares that can be issued
2. Issued. -> Total shares issued
3. Outstanding -> If all of them are converted to common shares including derivatives, preferred etc.,
Net income + Comprehensive income
Foreign currency translation adjustments.
Changes in shareholder's equity
Unrealized gains or losses in available for sale investments.
Reconciliation of the carrying amount of each class of equity capital.
Vertical vs Horizontal analysis
Vertical analysis compares the assets and liabilities in % of total assets.
Horizontal analysis compares with the year with a base year.
Common size analysis
It is same as vertical analysis.
Time series analysis
Comparing over a period of time (Year over year basis)
Cross sectional analysis
Comparing multiple companies or industries.
Acid test or Quick ratio
Long term Debt to equity
Debt to equity
Total assets / Total equity