Financial statements course · Lesson 3 of 10
The balance sheet shows what the company owns and owes on one date.
The income statement covers a period. The balance sheet is a picture on one date, the last day of the period. A 10-K shows two dates: the end of this year and the end of last year.
The statement
| Line, $ millions | Start of year | End of year |
|---|---|---|
| Cash | 114.9 | 150.0 |
| Receivables | 111.1 | 120.0 |
| Inventory | 83.3 | 90.0 |
| Total current assets | 309.4 | 360.0 |
| Property and equipment | 360.0 | 400.0 |
| Total assets | 669.4 | 760.0 |
| Payables | 55.6 | 60.0 |
| Accrued expenses | 27.8 | 30.0 |
| Deferred revenue | 18.5 | 20.0 |
| Total current liabilities | 101.9 | 110.0 |
| Debt | 250.0 | 250.0 |
| Total liabilities | 351.9 | 360.0 |
| Shareholders’ equity | 317.5 | 400.0 |
| Total liabilities and equity | 669.4 | 760.0 |
Assets always equal liabilities plus shareholders’ equity. Equity is what is left for the owners after the company pays all that it owes. At the end of the year, Example Co. had $760 million of assets and $360 million of liabilities, so equity was $400 million.
Current and long-term
Current assets are the assets that the company expects to turn into cash within one year. Current liabilities are the amounts that it expects to pay within one year. The rest is long-term.
- Receivables are sales that customers have not paid for yet.
- Inventory is goods that the company has made or bought but not sold yet.
- Payables are bills from suppliers that the company has not paid yet.
- Accrued expenses are costs that the company has had but not paid yet, such as wages.
- Deferred revenue is cash that customers paid before they got the product. The company owes them the product, so it is a liability.
Can the company pay its bills?
The current ratio divides current assets by current liabilities. For Example Co. it is $360.0M divided by $110.0M, or 3.27. The quick ratio leaves out inventory, because inventory can be slow to sell. It is 2.45.
A ratio above 1 means that the current assets cover the bills of the next year. A very high ratio can also mean cash that does no work. Compare the ratio with other companies in the same industry.
Book value
Equity of $400 million on 100 million shares is a book value of $4.00 a share. At a price of $30, the stock trades at 7.5x book value.
Book value records what the company paid for its assets, less depreciation. It does not show what the business can earn. For a company like Example Co., which earns a high return on little equipment, book value says little about value.
A note on the valuation course
The valuation course shows total assets of $650 million. It takes the current liabilities of $110 million away from the assets, as one working capital line. This course shows each line, so total assets are $760 million. Equity is $400 million in both.
Key points
- Assets equal liabilities plus equity, always.
- Current items turn into cash, or are paid, within one year.
- Book value is a record of cost, not a measure of value.
Sources
- SEC, Beginners’ Guide to Financial Statements, for the balance sheet equation, current items, the three sections of the cash flow statement and the statement of shareholders’ equity.