International Financial Statement Analysis

CHAPTER 5

UNDERSTANDING THE BALANCE SHEET

Thomas R. Robinson, CFA CFA Institute Charlottesville, Virginia

 

Hennie van Greuning, CFA World Bank Washington, DC

 

Elaine Henry, CFA University of Miami Miami, Florida

 

Michael A. Broihahn, CFA Barry University Miami, Florida

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

• Define and interpret the asset and liability categories on the balance sheet, and discuss the uses of a balance sheet.

• Describe the various formats of balance sheet presentation.

• Compare and contrast current and noncurrent assets and liabilities.

• Explain the measurement bases (e.g., historical cost and fair value) of assets and liabilities, including current assets, current liabilities, tangible assets, and intangible assets.

• List and explain the appropriate classifications and related accounting treatments for financial instruments.

• List and explain the components of shareholders’ equity.

• Interpret balance sheets, common-size balance sheets, the statement of changes in equity, and commonly used balance sheet ratios.

1. INTRODUCTION

The starting place for analyzing a company’s financial position is typically the balance sheet. Creditors, investors, and analysts recognize the value of the balance sheet and also its limitations. The balance sheet provides such users with information on a company’s resources (assets) and its sources of capital (its equity and liabilities/debt). It normally also provides information about ...