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The final component of financial statements are balance sheet, which will be the main topic for today.
Balance sheets are a snapshot of a company’s assets, liabilities and equity at a specific point of time. A big difference with the previous two financial statements is that balance sheets showcases what the company owns and what owes, as well as shareholders invested capital in a particular time. That’s why it’s sort of a snapshot. The previous two accounted for what happened during a certain and extended period of time.
For there not to be any doubts, assets are property rights over a resource with perceived current or future economic value, a liability is something the company owes to somebody else (debt), and equity represents the capital invested by investors. If the company decided to close down its business, after its assets are liquidated and debt is paid off, equity is what would be returned to shareholders.
Balance sheets are divided into those three components. Something to keep in mind of is that, always, a company’s assets value will be equal to the sum of liabilities plus equity. Every type of liability, as well as equity, have an asset as a counterpart and it’s gonna be accounted in both sections.
For example, if a company were to take a loan, for 10k, those 10k would go into their Liabilities since the company now owes 10k. However, those same 10k would appear in assets as Cash and Equivalents. Both cancel each other out. Same thing goes if a company were to raise capital with shareholders.
As the past two articles, lets continue using Google’s last quarter as an example. In each section, I’ll go trough the main splitting lines and the trickier subtitles.
As observed in the image, an assets section is subdivided into two different kind of assets, ‘Current Assets’ and ‘Non-current Assets’. This separation is done by examining the underlying asset’s nature. If such asset is very liquid, meaning it’s rapidly convertible into cash, it is called a current asset. If its nature is illiquid, it is called non-current asset. The actual factor splitting both is if the asset in question could be turned into cash in less than a year.
This gets to show easily in the third line of the balance sheet. Cash & cash equivalents, given its complete nature of liquidity, are denominated current assets. On the other hand, items like Property and Equipment are considered non-current assets, because if Google wanted to convert those assets into cash, it would take a long time.
Accounts receivable are money customers owe to Google for goods sold or services provided.
To defer something is to postpone it. It’s a very common concept in finance. Deferred income taxes appear on assets when a business ‘overpays’ its taxes. This money will eventually be returned to it in the form of a tax relief.
Intangible assets are conceptual assets, abstract assets. Things like brands form part of that world. These are valuable assets to have yet not with a tangible/concrete value.
Goodwill is an intangible asset recorded when a company acquires another. In this case, Google has increased its assets by 28bn dollars via acquisitions.
Liabilities are what a company owes to another company/institution. As assets, liabilities are also splitted into current and non-current ones, defined as well by the period in which they must be paid. Again, liabilities that must be paid in less than 12 months are current and, otherwise, non-current.
Accrued, in finance, stands for an expenditure or income that you register in your books but have not yet done. Therefore, accrued compensation and benefits are compensations and benefits, of course, an employee has earned with work or services provided but which will be paid for at a later date
Stockholder’s equity is the amount of money stakeholders have invested in the company, either directly via raises of capital done by it, or indirectly via retained earnings by the company.
Class A, Class B, Class C Stock is stock issued by the company, which sold to raise capital. Additional paid-in capital is the extra money stakeholders paid Google for those issued stocks.
Retained earnings is quite of a transparent name. Those retained earnings are used by the company to reinvest on itself or to pay off debt.
The article got longer than expected, hence we’ll not be diving deeper. The following set of writings are meant to extract insights from the different financial statements as well as highlight the importance of understanding them correctly. Hope you enjoyed and, once again, thank you very much for the support!
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