More of this Feature • Part 1: Lesson 3 Main • Part 2: How to Get Statements • Part 3: What's a Balance Sheet • Part 4: Typical Balance Sheet • Part 5: Current Assets • Part 6: Receivables • Part 7: Receivable Turns • Part 8: Inventory • Part 9: Inventory Turns • Part 10: Inventory Example • Part 11: Prepaid Expenses • Part 12: Current Liabilities • Part 13: Working Capital • Part 14: WC Per Dollar of Sales • Part 15: Negative Work. Cap • Part 16: Current Ratio • Part 17: Quick Ratio • Part 18: Long Term Investment • Part 19: Property, Plant, Equip. • Part 20: Intangible Assets • Part 21: Goodwill • Part 22: Deferred Charges • Part 23: Debt, Debt to Equity • Part 24: Other Liabilities • Part 25: Minority Interest • Part 26: Shareholder Equity • Part 27: Book Value • Part 28: Com. & Pref. Shares • Part 29: Cap. Surplus, Reserve • Part 30: Treasury Stock • Part 31: Retained Earnings • Part 32: Formula & Calculations • Part 33: Putting it all Together • Part 34: Segment 2

Related Resources • Investing Lesson 1 • Investing Lesson 2 • Investing Lesson 3 • More Investing Lessons

Sign up for our free Newsletter  Subscribe to the Newsletter

What is a Balance Sheet?

Pretend that you are going to apply for a loan to put a swimming pool into your backyard.  You go to the bank asking to borrow money, and the banker insists that you give him a list of your current finances.  After going home and looking over your statements, you pull out a blank sheet of paper and write down everything you have that is of value [your checking and savings account, mutual funds, house, and cars].  Then, at the bottom of the sheet your write down all of your debt [the mortgage, car payments, and your student loan].  You subtract everything you owe by all the stuff you have and come up with your net worth.

Congratulations, you just created a balance sheet.

Just as the bank asked you to put together a balance sheet to evaluate your credit-worthiness, the government requires companies to put them together several times a year for their shareholders.  This allows current and potential investors to get a snapshot of a company's finances.  Among other things, the balance sheet will show you the value of the stuff the company owns [right down to the telephones sitting on the desk of their employees], the amount of debt, how much inventory is in the corporate warehouse, and how much money the business has to work with in the short term.  It is generally the first report you want to look at when valuing a company.

Before you can analyze a balance sheet, you have to know how it is set-up.

Note: Unlike other financial statements, the balance sheet cannot cover a range of dates.  In other words, it may be good "as of December 31, 2002", but can't cover from December 1 - December 31.  This is because a balance sheet lists items such as cash on hand and inventory, which change daily.

Next page > What Does a Balance Sheet Look Like? >  1, 2, 3, 4, 5, 6, 7,  more >>