Understanding Balance Sheet Basics

There’s a puzzling fact about financial statements. Maybe you’ve noticed it.

Give a company’s financials to an experienced manager in the business, and the first thing he will turn to is the income statement. Most managers have—or aspire to have—“P&L responsibility.” They’re accountable for making the various forms of profit turn out right. They know that the income statement is where their performance is ultimately recorded. So that’s what they look at first.

Now try giving the same set of financials to a banker, an experienced Wall Street investor, or maybe a veteran board member. The first statement this person will turn to is invariably the balance sheet. In fact, she’s likely to pore over it for some ...

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