Financial Management: Principles and Applications, 13/e

3.4 The Balance Sheet

The income statement reports the cumulative results from operating the business over a period of time, such as one year. By contrast, the balance sheet is a snapshot of the firm’s financial position on a specific date. In its simplest form, the balance sheet is defined by the following equation:

$$\text{Total Assets }=\text{ Total Liabilities }+\text{ Total Shareholder}\text{'}\text{s Equity}$$(3–2)

Total liabilities represent the total amount of money the firm owes its creditors (including the firm’s banks and suppliers). Total shareholders’ equity refers to the difference in the value of the firm’s total assets and the firm’s total liabilities recorded in the firm’s balance sheet. As such, total shareholders’ equity refers to the book value of their investment ...