The Balance Sheet
Old accountants never die; they just lose their balance.
A balance sheet, also called the statement of condition or statement of financial position, provides a wealth of valuable information about a business firm, particularly when examined over a period of several years and evaluated in relation to the other financial statements. A prerequisite to learning what the balance sheet can teach us, however, is a fundamental understanding of the accounts in the statement and the relationship of each account to the financial statements as a whole. Consider, for example, the balance sheet inventory account. Inventory is an important component of liquidity analysis, which considers the ability of a firm to meet cash needs as they arise. (Liquidity analysis will be discussed in Chapter 6.) Any measure of liquidity that includes inventory as a component would be meaningless without a general understanding of how the balance sheet inventory amount is derived. This chapter will thus cover such issues as what inventories are, how the inventory balance is affected by accounting policies, why companies choose and sometimes change methods of inventory valuation, where to find disclosures regarding inventory accounting, and how this one account contributes to the overall measurement of a company’s financial condition and operating performance. This step-by-step descriptive treatment of inventories and other balance sheet accounts will provide the background necessary to analyze and interpret balance sheet information.
The balance sheet shows the financial condition or financial position of a company on a particular date. The statement is a summary of what the firm owns (assets) and what the firm owes to outsiders (liabilities) and to internal owners (stockholders’ equity). By definition, the account balances on a balance sheet must balance; that is, the total of all assets must equal the sum of... [continues]
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