Purposes of the Balance SheetHow many times have you flipped to the back of a company's annual report and found yourself blankly staring at the pages of numbers and tables? You know that these should be important to your investing decision, but you're not quite sure what they mean or where to begin.
In this investing lesson, we're going to take our first major step towards changing that by teaching you about the balance sheet. Smart investors have always known that financial statements are the keys to every company. They can warn of potential problems, and when used correctly, help determine what a business is really "worth". An investor who understands financial statements will never have to ask "is this company a good investment?".
The Role of the Balance Sheet In the Financial StatementsFor every business, there are three important financial statements you must examine: The Balance Sheet, the Income Statement, and the Cash Flow Statement. The balance sheet tells investors how much money the company has, how much it owes, and what is left for the stockholders. The cash flow statement is like the checking account; it shows you where the money is spent. The income statement is a record of the company's profitability. It tells you how much money a corporation made (or lost).
In this lesson, we are going to learn to analyze a balance sheet. There are two segments. In the first, we will go through a typical balance sheet and explain what each of the items means. In the second, we will actually look at the balance sheets of several American corporations and perform basic financial calculations on them.
Grab a cup of coffee, a nearby calculator and let's begin!
This page is part of Investing Lesson 3 - Understanding the Balance Sheet. To go back to the beginning, see the Table of Contents. If you have already read this lesson, you can skip directly to the Balance Sheet Quiz.