The Balance Sheet and Its Analysis Chapter 5. Purpose and Use of a Balance Sheet A balance sheet is...

The Balance Sheet and Its Analysis

Chapter 5

Purpose and Use of a Balance Sheet

A balance sheet is a systematic organization of everything “owned” and “owed” by a business or individual at a given time.

Assets – anything of value owned by the business or individual

Liability – any debt or other financial obligation

Net Worth – the amount the owners have invested in the business

Balance Sheet Format

Assets Current Assets Noncurrent Assets

Liabilities Current Liabilities Noncurrent Liabilities

Owner’s Equity

Asset Valuation and Related Problems

A cost basis balance sheet is required when following basic accounting principles. It values all assets using the cost, cost less

depreciation, or farm production cost methods. A market basis balance sheet would have all

assets valued at market value less estimated selling costs.

Balance Sheet Example

Asset Section Liability Section Owner Equity Section

Balance Sheet Analysis

Analyzing Liquidity Current Ratio = Current Asset Value/Current

Liability Value Working Capital = Current Assets – Current

Liabilities

Balance Sheet Analysis

Analyzing Solvency Debt/Asset Ratio = Total Liabilities/Total

Assets Equity/Asset Ratio = Total Equity/Total Assets

Debt/Equity Ratio = Total Liabilities/Owner Equity

Summary of Analysis

Measure Market Basis

Liquidity:

Current Ratio

Working Capital

1.27

$23,640

Solvency:

Debt/Asset Ratio

Equity/Asset Ratio

Debt/Equity Ratio

0.50

0.50

0.99

Ratios calculated from page76 -- Table 5-4