Balance Sheet Elements

Assets (A): Resources controlled by the company as a result of past

events and from which future economic benefits are expected to flow
to the entity.
Liabilities (L): Obligations of a company arising from past events,
the settlement of which is expected to result in an outflow of
economic benefits from the entity.
Equity (E): Represents the owners residual interest in the
companys assets after deducting its liabilities.
1

Accounting Equation
Assets

Resources

Resources
to use to
generate
revenues

Liabilities + Owners Equity

Sources of Funding

Creditors
claims
against
resources

Owners
claims
against
resources

Current And Noncurrent

Assets
Current Assets: Assets expected to be sold, used up, or
otherwise realized in cash within one year or one operating
cycle of the business, whichever is greater, after the
reporting period.
Noncurrent Assets: Assets not classified as current. Also
known as long-term or long-lived assets.

Current And Noncurrent

Liabilities
Current Liabilities: Liabilities expected to be settled within
one year or within one operating cycle of the business.
Noncurrent Liabilities: All liabilities not classified as
current.

Equity
Equity is the residual claim on a company s assets after
subtracting liabilities.
It represents the claim of the owner against the company.
Equity includes funds directly invested in the company by
the owners, as well as earnings that have been reinvested
over time.
Equity can also include items of gain or loss that are not yet
recognized on the company s income statement.
10

Common-size Balance Sheets

($ thousands)
ASSETS
Cash, cash equivalents, marketable securities
Accounts receivable
Inventory
Total current assets
Property, plant, and equipment, net
Goodwill
Total assets
LIABILITIES AND EQUITY
Accounts payable
Total current liabilities
Long-term bonds payable
Total liabilities
Total shareholders equity
Total liabilities and shareholders equity

1,900
500
100
2,500
750
0
3,250

200
1,050
950
2,200
750
300
3,250

3,300
1,500
300
5,100
4,650
0
9,750

0
0
10
10
3,240
3,250

2,500
2,500
10
2,510
740
3,250

600
600
9,000
9,600
150
9,750
12

Common-size Balance Sheets

(percent of total assets)
ASSETS
Cash, cash equivalents, marketable securities
Accounts receivable
Inventory
Total current assets
Property, plant, and equipment, net
Goodwill
Total assets
LIABILITIES AND SHAREHOLDERS EQUITY
Accounts payable
Total current liabilities
Long-term bonds payable
Total liabilities
Total shareholders equity
Total liabilities and shareholders equity

58.46%
15.38%
3.08%
76.92%
23.08%
0.00%
100.00%

6.15%
32.31%
29.23%
67.69%
23.08%
9.23%
100.00%

33.85%
15.38%
3.08%
52.31%
47.69%
0.00%
100.00%

0.00%
0.00%
0.31%
0.31%
99.69%
100.00%

76.92%
76.92%
0.31%
77.23%
22.77%
100.00%

6.15%
6.15%
92.31%
98.46%
1.54%
100.00%
13

Balance Sheet Ratios: Liquidity

Ratios
Liquidity ratios indicate a companys ability to meet current
liabilities.
Ratio

Calculation

Current

Current assets /Current liabilities

Quick (acid test)

(Cash + Marketable securities + Receivables)

Current liabilities

Cash

(Cash + Marketable securities)

Current liabilities

14

Balance sheet Ratios: Solvency

Ratios
Solvency ratios indicate financial risk and financial leverage and a
companys ability to meet its financial obligations over time.
Ratio

Calculation

Total Equity

Long-term Debt To Equity

Total Long-term Debt

Debt To Equity

Total Debt

Total Equity

Total Debt (Also Known As

Debt To Assets)

Total Debt

Total Assets

Debt To Capital

Total Debt

(Total Debt + Total Equity)

Financial Leverage

Total Assets

Total Equity
15