Balance Sheet

Lesson

The balance sheet is a financial report that provides a snapshot of a company's financial position at a specific point in time. It shows the company's assets, liabilities, and equity and helps investors and analysts evaluate its financial health and stability.

Practice Question #1

Which of the following is NOT a component of a balance sheet?

A) Assets

B) Liabilities

C) Equity

D) Revenue

Select an option above to see an explanation here.

A) Assets are a component of the balance sheet. B) Liabilities are a component of the balance sheet. C) Equity is a component of the balance sheet. D) Revenue is not a balance sheet component; it is part of the income statement.

Terms

Assets:: Resources owned by a company that has economic value and can be used to generate future cash flows.
Liabilities:: Obligations a company owes to others, such as loans, accounts payable, and long-term debt.
Equity:: The residual interest in a company's assets after deducting liabilities, also known as shareholder's equity or net assets.
Current Assets:: Assets expected to be converted into cash or used up within one year, such as cash, accounts receivable, and inventory.
Current Liabilities:: Obligations expected to be settled within one year, such as accounts payable and short-term debt.
Long-term Assets:: Assets that are expected to provide benefits for more than one year, such as property, plant, and equipment.
Long-term Liabilities:: Obligations that are not expected to be settled within one year, such as long-term debt and deferred tax liabilities.
Retained Earnings:: The accumulated net income of a company that has not been distributed as dividends to shareholders.
Working Capital:: The difference between current assets and current liabilities represents a company's ability to meet short-term obligations.
Liquidity Ratios:: Financial ratios measuring a company's ability to meet short-term obligations, such as the current and quick ratios.

Practice Question #2

What does working capital represent?

A) The difference between current assets and current liabilities

B) The difference between long-term assets and long-term liabilities

C) The accumulated net income of a company

D) The company's ability to generate cash from operations

Select an option above to see an explanation here.

A) Working capital represents the difference between current assets and current liabilities. B) This is not the definition of working capital. C) This is the definition of retained earnings, not working capital. D) This is related to the cash flow statement, not working capital.

Do Not Confuse With

Income Statement:: A financial report that shows a company's revenues, expenses, and net income over a specific period, unlike the balance sheet, which is a snapshot at a particular point in time.
Cash Flow Statement:: A financial report that shows a company's cash inflows and outflows over a specific period, providing insight into the company's ability to generate cash from operations, investing, and financing activities.

Practice Question #3

What does a balance sheet primarily represent?

A) A company's financial position at a specific point in time

B) A company's financial performance over a period of time

C) A company's cash inflows and outflows over a period of time

D) A company's dividend payments over a period of time

Select an option above to see an explanation here.

A) A balance sheet represents a company's financial position at a specific point in time, showing its assets, liabilities, and equity. This is the correct answer. B) A company's financial performance over a period of time is represented by the income statement, not the balance sheet. C) A company's cash inflows and outflows over a period of time are represented by the cash flow statement, not the balance sheet. D) A company's dividend payments over a period of time are not the primary focus of the balance sheet.

Historical Example

In the late 1990s, a major technology company reported impressive revenue growth, but a closer look at its balance sheet revealed a significant increase in accounts receivable and inventory. This indicated potential issues with the company's cash flow and ability to collect customer payments. As a result, the company's stock price declined, and it eventually filed for bankruptcy.