Crash Course in Accounting and Financial Statement Analysis, Second Edition

Summary

The balance sheet reports the company’s resources (assets) and how those resources were funded (liabilities and shareholders’ equity) on a particular date (end of the quarter or fiscal year).

• By definition, assets must equal liabilities + shareholders’ equity; they are two sides of the same coin (Exhibit 6.24).

• Assets represent the company’s resources, which must have value, be measurable and of quantifiable cost, and be company owned.

• Assets are reported at their historical (acquisition) cost, in-line with the conservatism principle.

• Liabilities represent the company’s obligations to others, which must be measurable and their occurrence probable. These liabilities stem from a company’s operating and financing activities.

• Shareholders’ equity represents monetary contributions from a company’s stock (equity) owners and from the course of its operations.

• Companies can choose to fund themselves through the sale of their shares of stock and through retained earnings, which they have accumulated over the course of their existence.

• Liabilities and shareholders’ equity form two primary sources of funding for companies.

Exhibit 6.24. The Balance Sheet Reports the Company’s Resources (Assets) and Their Funding (Liabilities and Shareholders’ Equity)