The balance sheet is one of the three core financial statements that reports a company's assets, liabilities, and shareholder equity at a specific period. For a balance sheet to reflect the true picture, it follows an equation that equates assets with the sum of liabilities and shareholder equity. (Assets = Liabilities + Equity). It is generally used along with the income statement and cash flow statement.
The balance sheet is used by executives, investors, analysts, and regulators to evaluate a company’s performance. A healthy balance sheet usually means strong cash position, high qualify assets, very little or no debt and a high amount of shareholder's equity.
In this article, we will briefly talk about the most familiar items under assets.
What are the Assets?
Assets are items owned or controlled by a company for the purpose of utilizing it in order to generate future revenues or maintain its operation.
What are the Types of Assets?
1- Current and Non-current Assets
A company’s assets are divided into two types: current assets, which can be converted to cash within one year or less; and non-current or long-term assets, which cannot be converted.
2- Fixed Assets
Fixed assets include land, office furniture, machinery, equipment, building and its mainly used in its operations to generate income. Fixed assets are not expected to be consumed or converted into cash within a year.
Long-term investments are tangible or intangible assets acquired to generate additional income or held for speculation in the hope of a future rise in value. Such as mutual funds, stocks, bonds, and real estate.
Receivables are debts owed to a company by its customers for goods or services that have been delivered or used but not yet paid for.
The components of receivables:
1- The aging of accounts receivables
It is the analysis of customer balances by the length of time they have been unpaid.
2- The quality of accounts receivable
It is the likelihood that the cash flows that are owed to a company in the form of receivables are going to be collected.
3- Level of sales
The most essential component in determining the size of accounts receivable is the level of sales. In general, a company with a high volume of sales will have a higher amount of receivables than one with a low volume of sales.
Inventories are products or items that a company intends to sell for a profit. These items include any raw production materials, merchandise, and products that are either finished or unfinished.
A prepaid is an expense that has already been paid but has not yet been consumed.
The cash amount stated on the Balance Sheet is the cash available in the bank account.