The balance sheet is one of the four core financial statements used to report the company’s financial information. The three primary characteristics documented in the balance sheet are assets, liabilities, and shareholder equity (“The four core financial statements,” n.d.). The former refers to cash, inventories, land, equipment, and other purchases and acquisitions of the company. It is essential to record the assets to understand the organization’s financial state and make weighted decisions and investments. Liabilities refer to obligations that the company needs to pay for, such as salaries or debts. Shareholder equity concerns the overall capital invested in the company and can be calculated as Assets – Liabilities.
As a result, the balance sheet conveys crucial financial information, beneficial for corporations and investors. It is possible to understand the company’s economic state by using financial ratios that could be derived from the statement. Therefore, investors can evaluate the organization’s business performance by analyzing the balance sheet. If the assets are not balanced with liabilities and shareholder equity, it might imply financial problems. Lastly, it is essential to note that balance sheets are recorded as information at a particular date, indicating the importance of other financial statements for a complete business performance analysis.
The total amount of assets for the ABC company constitutes current assets ($144,000) and long-term assets ($128,000) and is equal to $272,000. The total liabilities comprise current liabilities ($26,000) and long-term liabilities ($90,000), equivalent to an overall $116,000.
In the current case, short-term receivables exceed short-term payables by $3,000. It implies that the company generates more money from its received assets, such as revenue from buyers, than it needs to pay to suppliers and vendors.
The order of assets and liabilities listed on the balance sheet is significant because it correlates with their relevance to the current economic operations. For instance, assets are sorted by how quickly they can be converted into cash, and the order of liabilities correlates with their payment date.
The total debt formula is totaldebt=(short term debt + long term debt)
Therefore, the total amount owed = $26,000 + $90,000 = $116,000
Total assets of the company ($272,000) exceed total liabilities ($116,000), which is important since it allows for more equity. Thus, the difference between net assets and net liabilities assumes more money in retained earnings ($96,000), which can be reinvested in the company and expand the business (“Classified balance sheets,” n.d.).
If the company borrows an additional $10,000, the two balance sheet accounts will not change. The new Total Assets will be equal to $282,000, while the Total Liabilities will be equal to $126,000.
Retained earnings refer to the generated revenue that can be reinvested in the business and used to further develop the company (“Classified balance sheets,” n.d.).
According to the balance sheet, the total wealth of the company could be perceived as equity (Common Stock + Paid-in Capital + Retained Earnings) or Total Assets – Total Liabilities. In the current case, the total wealth is equal to $156,000 or $272,000 – $116,000.
If the company pays $10,000 to dividends, Cash and Retained Earnings will be affected negatively. The new value of the Cash graph will become $82,000, while Retained Earnings will decrease to $86,000 to preserve the balance between Assets and Liabilities with Equity.
References
Classified balance sheets. (n.d.). Principles of Accounting.
The four core financial statements. (n.d.). Principles of Accounting.