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› Resources Accounting Balance Sheet
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Table of Contents
What is the Balance Sheet?
o Balance Sheet Example
o Download the Free Template
o How the Balance Sheet is Structured
o How is the Balance Sheet used in Financial Modeling?
o Importance of the Balance Sheet
o Video Explanation of the Balance Sheet
o Learn More About the Financial Statements
Balance Sheet
Assets = Liabilities + Shareholders' Equity
Written by CFI Team
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What is the Balance Sheet?
The balance sheet is one of the three fundamental financial statements and is key to
both financial modeling and accounting. The balance sheet displays the company’s
total assets and how the assets are financed, either through either debt or equity. It
can also be referred to as a statement of net worth or a statement of financial
position. The balance sheet is based on the fundamental equation: Assets =
Liabilities + Equity.
Image: CFI’s Financial Analysis Course
As such, the balance sheet is divided into two sides (or sections). The left side of the
balance sheet outlines all of a company’s assets. On the right side, the balance sheet
outlines the company’s liabilities and shareholders’ equity.
The assets and liabilities are separated into two categories: current asset/liabilities
and non-current (long-term) assets/liabilities. More liquid accounts, such as
Inventory, Cash, and Trades Payables, are placed in the current section before illiquid
accounts (or non-current) such as Plant, Property, and Equipment (PP&E) and Long-
Term Debt.
Balance Sheet Example
Below is an example of Amazon’s 2017 balance sheet taken from CFI’s Amazon Case
Study Course. As you will see, it starts with current assets, then non-current assets,
and total assets. Below that are liabilities and stockholders’ equity, which includes
current liabilities, non-current liabilities, and finally shareholders’ equity.
Example: Amazon.com’s Balance Sheet
View Amazon’s investor relations website to view the full balance sheet and annual
report.
Download the Free Template
Enter your name and email in the form below and download the free template now!
You can use the Excel file to enter the numbers for any company and gain a deeper
understanding of how balance sheets work.
How the Balance Sheet is Structured
Balance sheets, like all financial statements, will have minor differences between
organizations and industries. However, there are several “buckets” and line items that
are almost always included in common balance sheets. We briefly go through
commonly found line items under Current Assets, Long-Term Assets, Current
Liabilities, Long-term Liabilities, and Equity.
Learn the basics in CFI’s Free Accounting Fundamentals Course.
Current Assets
Cash and Equivalents
The most liquid of all assets, cash, appears on the first line of the balance sheet. Cash
Equivalents are also lumped under this line item and include assets that have short-
term maturities under three months or assets that the company can liquidate on
short notice, such as marketable securities. Companies will generally disclose what
equivalents it includes in the footnotes to the balance sheet.
Accounts Receivable
This account includes the balance of all sales revenue still on credit, net of any
allowances for doubtful accounts (which generates a bad debt expense). As
companies recover accounts receivables, this account decreases, and cash increases
by the same amount.account
Inventory
Inventory includes amounts for raw materials, work-in-progress goods, and finished
goods. The company uses this account when it reports sales of goods, generally
under cost of goods sold in the income statement.
Non-Current Assets
Plant, Property, and Equipment (PP&E)
Property, Plant, and Equipment (also known as PP&E) capture the company’s tangible
fixed assets. The line item is noted net of accumulated depreciation. Some companies
will class out their PP&E by the different types of assets, such as Land, Building, and
various types of Equipment. All PP&E is depreciable except for Land.
Intangible Assets
This line item includes all of the company’s intangible fixed assets, which may or may
not be identifiable. Identifiable intangible assets include patents, licenses, and secret
formulas. Unidentifiable intangible assets include brand and goodwill.
Current Liabilities
Accounts Payable
Accounts Payables, or AP, is the amount a company owes suppliers for items or
services purchased on credit. As the company pays off its AP, it decreases along with
an equal amount decrease to the cash account.
Current Debt/Notes Payable
Includes non-AP obligations that are due within one year’s time or within one
operating cycle for the company (whichever is longest). Notes payable may also have
a long-term version, which includes notes with a maturity of more than one year.
Current Portion of Long-Term Debt
This account may or may not be lumped together with the above account, Current
Debt. While they may seem similar, the current portion of long-term debt is
specifically the portion due within this year of a piece of debt that has a maturity of
more than one year. For example, if a company takes on a bank loan to be paid off in
5-years, this account will include the portion of that loan due in the next year.
Non-Current Liabilities
Bonds Payable
This account includes the amortized amount of any bonds the company has issued.
Long-Term Debt
This account includes the total amount of long-term debt (excluding the current
portion, if that account is present under current liabilities). This account is derived
from the debt schedule, which outlines all of the company’s outstanding debt, the
interest expense, and the principal repayment for every period.
Shareholders’ Equity
Share Capital
This is the value of funds that shareholders have invested in the company. When a
company is first formed, shareholders will typically put in cash. For example, an
investor starts a company and seeds it with $10M. Cash (an asset) rises by $10M, and
Share Capital (an equity account) rises by $10M, balancing out the balance sheet.
Retained Earnings
This is the total amount of net income the company decides to keep. Every period, a
company may pay out dividends from its net income. Any amount remaining (or
exceeding) is added to (deducted from) retained earnings.
How is the Balance Sheet used in Financial Modeling?
This statement is a great way to analyze a company’s financial position. An analyst
can generally use the balance sheet to calculate a lot of financial ratios that help
determine how well a company is performing, how liquid or solvent a company is,
and how efficient it is.
Changes in balance sheet accounts are also used to calculate cash flow in the cash
flow statement. For example, a positive change in plant, property, and equipment is
equal to capital expenditure minus depreciation expense. If depreciation expense is
known, capital expenditure can be calculated and included as a cash outflow under
cash flow from investing in the cash flow statement.
Screenshot from CFI’s Financial Analysis Course.
Importance of the Balance Sheet
The balance sheet is a very important financial statement for many reasons. It can be
looked at on its own and in conjunction with other statements like the income
statement and cash flow statement to get a full picture of a company’s health.
Four important financial performance metrics include:
1. Liquidity – Comparing a company’s current assets to its current liabilities
provides a picture of liquidity. Current assets should be greater than current
liabilities, so the company can cover its short-term obligations. The Current
Ratio and Quick Ratio are examples of liquidity financial metrics.
2. Leverage – Looking at how a company is financed indicates how much leverage
it has, which in turn indicates how much financial risk the company is taking.
Comparing debt to equity and debt to total capital are common ways of
assessing leverage on the balance sheet.
3. Efficiency – By using the income statement in connection with the balance
sheet, it’s possible to assess how efficiently a company uses its assets. For
example, dividing revenue by the average total assets produces the Asset
Turnover Ratio to indicate how efficiently the company turns assets into revenue.
Additionally, the working capital cycle shows how well a company manages
its cash in the short term.
4. Rates of Return – The balance sheet can be used to evaluate how well a
company generates returns. For example, dividing net income by shareholders’
equity produces Return on Equity (ROE), and dividing net income by total assets
produces Return on Assets (ROA), and dividing net income by debt plus equity
results in Return on Invested Capital (ROIC).
All of the above ratios and metrics are covered in detail in CFI’s Financial Analysis
Course.
Video Explanation of the Balance Sheet
Below is a video that quickly covers the key concepts outlined in this guide and the
main things you need to know about a balance sheet, the items that make it up, and
why it matters.
As discussed in the video, the equation Assets = Liabilities + Shareholders’
Equity must always be satisfied!
Learn More About the Financial Statements
To continue learning and advancing your career as a financial analyst, these
additional CFI resources will be helpful:
Free Accounting Fundamentals Course
Income Statement
Current Liabilities
Three Financial Statements
Three Financial Statement Model
See all accounting resources
Get Certified for Financial Modeling (FMVA)®
Gain in-demand industry knowledge and hands-on practice that will help you stand
out from the competition and become a world-class financial analyst.
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