Balance sheet: reports a company’s financial position at a point in time.
It reports the company’s
resources (assets), namely, what the company owns. It also reports the sources of asset financing.
Income statement: reports on a company’s performance over a period of time and lists amounts for its
top line revenues (also called sales) and its expenses. The income statement reports Revenues earned
during a period, Expenses incurred to produce those revenues, Net income or loss (Revenue – Expenses)
Expense:
Asset: Companies acquire assets to yield a return for their shareholders. Assets are expected to produce
economic benefits in the form of revenues, either directly, such as with inventory, or directly, such as
with a manufacturing plant produces inventories for sale. To create stockholder value, assets must yield
income that is in excess of the cost of the funds used to acquire the assets.
Current assets: The balance sheet assets in order of decreasing liquidity, which refers to the ease of
converting noncash assets into cash. The most liquid assets are called current assets, and they are listed
first. Typical examples of current assets follow: Cash—currency and bank deposits, cash equivalents,
Short-term investments, Accounts receivable, net, Inventories, Prepaid expenses.
Long term assets: The second section of the balance sheet reports long-term (noncurrent) assets. They
include: Property, plant, and equipment (PPE), net, Long-term investments, Intangible and other assets
Liabilities: are future economic sacrifices and have the following two characteristics: unavoidable
obligation for the company and arise from a past transaction or event. When a liability represents an
amount that must be repaid in the future and can be: Interest bearing, Non-interest bearing, An accrual
of expected payments
Current Liabilities: the balance sheet lists liabilities in order of maturity. Obligations that must be settled
within one year are called current liabilities: they can be: Account payable, Accrued liabilities, Unearned
revenues, Short-term debt, Current maturities of long-term debt.
Noncurrent liabilities: are obligations due after one year. They can be: Long-term debt, Other long-term
liabilities,
Stockholders’ equity: represents capital that has been invested by the stockholders either directly via
the purchase of stock, or indirectly in the form of retained earnings that reflect earnings that are
reinvested in the business and not paid out as dividends
Financial ratios: are useful indicators of an entity’s performance and financial condition. They will be
used by stakeholders independently to assess trends and predict risks. There are limitations since the
data is primarily historical in nature.
Return on Equity (ROE):
ROA
Current ratio
