blog Bonorum et Malorum

13 Things About Balance Sheet You May Not Have Known

Written by Fmi.Online

A balance sheet is one of the three key financial statements, the other two being income statement and cash flow statement. It is a representation of the company’s assets (what it owns), liabilities, (what it owes) and shareholders’ equity (what is owned by shareholders). A balance sheet can be instrumental to you if you run a business, if you are an accounting student, or if you work in the financial sector. Hence, in this article, we help you understand some of the lesser known facts about balance sheets:

1. Balance sheet is prepared at a given date:

2. A balance sheet is also called statement of financial position:

Since this financial tool states a company’s position at a particular time, it is also, although less commonly, called the Statement of Financial Position. 

3. A balance sheet must be well, balanced:

As the name suggests, a balance sheet must demonstrate an equilibrium. This is between the assets, liabilities and shareholder’s equity. A company’s assets must equal their liabilities plus shareholders’ equity

4. There are typically 5 broad parts to a balance sheet:

Within its 3 major components, a balance sheet encompasses 5 key broad categories: 

a. Current assets: items a company owns that are liquid (can be turned into cash) within one year such as accounts receivable, inventory, cash etc.
b. Non-current assets: items a company owns for a more permanent time period such as property, equipment etc.
c. Current liabilities: debt due within one year such as accounts payable, sales tax payable, wages payable etc.
d. Non-current liabilities: debt due beyond one year like long-term debt
e. Shareholders’ equity: shareholders’ investment and retained earnings

5. Any transaction in one part of the balance sheet must always offset another:

In order for a balanced sheet to remain balanced, any transaction reflected in one part of the balance sheet will also affect another. For example, if you pay off one of your creditors, you will reduce that amount from the liabilities but since it must have been paid using existing cash hence, that would also go down, once again balancing the statement.

6. A balance sheet can show a business’ net worth:

A balance sheet is the single most important instrument to determine a company’s net worth. Net worth is the value of the assets owned minus the liabilities owed. Positive net worth is when assets exceed liabilities and negative net worth is when liabilities eclipse assets. 

7. Balance sheets are crucial for financial analysis:

Analysts use balance sheets to understand a company’s financial position. They are especially integral when evaluating a company for mergers, asset liquidations, expanding or paying debt. For example, during a merger or acquisition, the balance sheet can help determine what the company is worth, which can help decide the appropriate resultant amount to be paid for the merger or acquisition.

8. Balance sheets are useful to investors:

Potential and current investors can use the balance sheet to calculate various financial ratios to base their investment decisions on. For example, current ratio is current assets/current liabilities. Investors can use this to gauge short-term financial risk. Similarly, debt-to-equity ratio is calculated by dividing the total liabilities by the total stockholders’ equity. It shows how much equity relative to debt is used to finance the company’s assets.

9. Publicly-traded companies are required to file balance sheets:

All companies listed on the stock exchanges must file their balance sheets with a regulatory authority such as the Securities and Exchange Commission (SEC) in the United States, with provisions for doing so at the end of every quarter and year. Each country has its own equivalent of such an authority.

10. You can create a balance sheet using a template:

11. This is what a balance sheet looks like:

To gain a better understanding of what balance sheets comprise and look like, here are snapshots of year-on-year balance sheets from different sectors. As you will see in each of them, Total Assets = Total Liabilities + Total Equity.

12. A balance sheet is not an end-all be-all of a company’s financial health:

While a balance sheet is undoubtedly one of the most vital tools for financial accounting and analysis, it may not always reveal a complete picture of a company’s financial dexterity. That’s the reason financial statements come in sets of three including the Income Statement and the Cash Flow Statement. To accurately dissect a business’ financial health, an authentic analyst must always look at the three statements in tandem. A balance sheet, for example, records assets at their historical cost or the cost they were purchased at and not the current value. To find out the current value, you’d have to look at the depreciation expense under the income statement. Thus, a balance sheet does have its limitations. Further, as Henry Ford famously said, “The two most important things in any company do not appear in its balance sheet: its reputation and its people.”

13. You can learn how to analyse a balance sheet with the right training:

Conclusion:

Balance sheets are an essential tool in any analyst’s toolkit. The equation driving a balance sheet might seem simple enough with Assets = Liabilities + Equity yet each of these sections contains its own nuances, and together they provide a snapshot of a company’s finances. For this reason, only an elaborate understanding of this statement and its intricacies, combined with that of the income and cash flow statements can help you become adept at conducting a business’ financial analysis.

More Articles

Investment Banking

The role of investment bankers in the financial world: what do investment bankers do, and why are they important?

Investment bankers play a critical role in the financial world by helping businesses and governments raise capital, facilitating mergers and acquisitions, and providing strategic advice on corporate restructuring. They are vital to the functioning of the capital markets, and their work helps drive economic growth and stability.

Read more

Preparing For Case Studies And Other Interview Assessments in 2023

At FMI, we understand the importance of interview preparation, including case studies and other assessments. That's why we offer an Interview Preparation Bundle course to help you prepare for your next interview

Read more
Investment Banking

How can you earn a six-figure salary at top investment banking firms without any experience in 2023

To earn a six-figure salary as a fresh investment banker, you need to work hard to get a full-time job at a top investment bank and maximize your bonuses. A strong educational background, relevant skill set, and investment banking internships can help you secure a job.

Read more

How you can get a front-facing role in a top investment bank without any experience in 2023

Learn how to get a front-facing role in a top investment bank without any prior experience. Understand what front desk jobs in finance are and the skills required, get the right qualifications, internships, network, and build the right skill set. Show your willingness and dedication to the role through internships, and make a good impression through networking.

Read more
Interview Prep

How to make a successful career in the derivatives market in 2023

A career in the derivatives market offers job paths of derivatives trader, derivative operations analyst and derivatives risk analyst. Traders need finance/economics degree, financial market knowledge and technical skills. Operations analysts need business administration/accounting degree and derivative knowledge. Risk analysts need risk management experience and education. The career is demanding but offers high compensation and growth opportunities.

Read more

Here are the top investment banking internships you should be aiming for in 2023!

Explore the top investment banking internships for 2023, including JP Morgan, Goldman Sachs, Morgan Stanley, and Bank of America. Learn about the duration, requirements, and responsibilities of these highly competitive internships, as well as the benefits of gaining experience with one of the top investment banks in the world. Discover how an internship with a top investment bank can boost your resume and improve your odds of landing a full-time job in the industry.

Read more
Interview Prep

How an investment banking simulation can train you for your dream career in IB

Simulation replicates the real world to deliver a specific experience in a controlled environment. It prepares candidates to answer case study questions asked during the investment banking interview.

Read more

Here’s what your resume should look like as an investment banking aspirant in 2023

Here's what your resume should look like as an investment banking aspirant | Fmi Online

Read more

Here are the top 3 investment banking interview questions in 2023

Here are the top 3 investment banking interview questions Investment banking interviews are designed to evaluate how fit a candidate is for the leading job role in the field of finance, and therefore should be attended with a decent level of preparation.  Candidates must have a solid understanding of corporate finance fundamentals, and company valuation, […]

Read more
Interview Prep

What you might be lacking in your IB interview prep

Going through the fundamentals of finance, working on DCF calculations, and preparing financial models are some of the more obvious things that an aspiring investment banker prepares for before interviewing for a job at a top investment bank. But what about the subtle nuances that could determine whether you will land a job or not? […]

Read more
Our Courses are designed to boost your career

Launch your career with Fmi’s Learning Pathway

Choose a learning pathway that best meets your needs and ambitions. Not sure which Fmi learning pathway is right for you? Explore our CareerBuddy videos for help and advice.

Investment banking pathway

Investment banking pathway

Monthly Subscription
  • courses-clock60+ hours
  • courses-desktop9 courses

Investment banking offers many exciting career opportunities for students. From Financial Analysts to Investment Management, and Sales & Trading to a wide range of roles in infrastructure such as IT, Risk or Compliance. This pathway is designed to help you understand the investment banking industry, the roles investment banks are recruiting for, and most importantly, help you to develop the practical skills you need to get into the industry and your preferred role whether this be as part of a school leaver, intern or graduate program.

FMI Online Student join-student-img2 FMI Online Student
55,000+ students currently enrolled
Global markets pathway

Global markets pathway

Monthly Subscription
  • courses-clock70+ hours
  • courses-desktop10 courses

Global markets provide a range of important products and services to corporates, institutions and governments worldwide from executing trades and managing risk to providing quality research content. A key business area in all investment banks, global markets offers a wide range of career paths for students to consider across all functions and at all levels from school leavers to internships through to graduate programs.

FMI Online Student join-student-img2 FMI Online Student
85,000+ students currently enrolled
Asset management pathway

Asset management pathway

Monthly Subscription
  • courses-clock50+ hours
  • courses-desktop8 courses

The asset management industry is a global industry worth over 100 trillion US dollars. It plays a crucial role in managing the assets of retail and institutional investors, offering a wide range of exciting careers in doing so. If you’re looking to forge a career in asset management, our Asset management pathway is perfect for you. We help you build the skills all asset managers are looking for and explore everything you need to know about the industry and the wide range of roles available in the sector

FMI Online Student join-student-img2 FMI Online Student
100,000+ students currently enrolled