Download Assets = Liabilities + Shareholders` Equity

The Balance Sheet
The balance sheet, together with the
income statement and cash flow
statement, make up the cornerstone of
any company’s financial statements.
The Balance Sheet
• Also known as a “statement of financial
position”
• Reveals a company’s assets, liabilities
and owners’ equity
• A snapshot of the company’s financial
position at a single point in time
• Divided into two parts that must equal,
or balance each other…
The Balance Sheet
The balance sheet equation:
Assets = Liabilities + Shareholders’ Equity
The Balance Sheet
• Assets are equal to the sum of the company’s equity
investment or capitalization, plus retained earnings,
minus any current financial obligations or debt.
• Assets are what a company uses to operate its
business, while its liabilities and equity are two
sources that support these assets.
• Owner or shareholder equity is the amount of money
initially invested into the company plus any retained
earnings and it represents a source of funding for the
business.
Ratios
Debt-to-Equity Ratio
• A measure of a company’s financial
leverage
• Calculated by dividing total liabilities by
shareholders’ equity
• Indicates what proportion of equity and
debt the company is using to finance its
assets.
Debt-to-Equity Ratio
Debt-to-Equity equation:
Total liabilities ÷ Shareholder equity
• Sometimes only interest-bearing, long-term
debt is used instead of total liabilities in the
calculation
• This ratio can be applied to personal financial
statements as well as corporate ones
Debt-to-Equity Ratio
• A measure of a company’s financial
leverage
• Calculated by dividing total liabilities by
shareholders’ equity
• Indicates what proportion of equity and
debt the company is using to finance its
assets.
Quick Ratio
• An indicator of a company’s short-term
liquidity
• Shows the dollar amount of liquid assets
available for each dollar of current
liabilities
• Measures a company’s ability to meet its
short-term obligations with its most
liquid assets
Quick Ratio
Quick Ratio equation:
Assets – Inventories ÷ Liabilities
• Assets include cash and equivalents,
marketable securities, and accounts
receivable
• The higher the Quick Ratio, the better the
company’s liquidity
Debt Service Coverage Ratio
• A measure of a company’s ability to meet its
financial obligations
• Generally, the higher the coverage ratio, the
better the ability to fulfill obligations to lenders
• The trend of coverage ratios over time is also
studied by analysts and investors to ascertain
the change in a company’s financial position.
• Common coverage ratios include the interest
coverage, debt service coverage and asset
coverage
Inventory and Sales
Days Sales Outstanding (DSO)
• A measure of the average number of days
that a company takes to collect revenue
after a sale has been made
• A low DSO number means that it takes a
company fewer days to collect its accounts
receivable
• A high DSO number shows that a company
is selling its product to customers on credit
and taking longer to collect money
Days Sales Outstanding (DSO)
Calculating DSO:
Accounts Receivable ÷ Total Credit Sales
× Number of days in period
Inventory Turnover
• Also known as inventory turns, stock
turns, and stock turnover
• How to calculate:
Cost of good sold ÷ Average inventory
Inventory Turnover
• A low turnover rate may point to overstocking,
obsolescence, or deficiencies in the product line
or marketing effort.
• However, in some instances a low rate may be
appropriate, such as where higher inventory
levels occur in anticipation of rapidly rising
prices or expected market shortages.
• Conversely a high turnover rate may indicate
inadequate inventory levels, which may lead to
a loss in business as the inventory is too low.
This often can result in stock shortages.
Tangible Net Worth
• A measure of the physical worth of a
company, not including intangible assets
such as copyrights, patents and
intellectual property.
• How to calculate:
Tangible Net Worth =
Total assets − liabilities − Intangible assets
Gross Margins
• …
Contribution Margins
• …
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