O'Reilly logo

International Financial Statement Analysis, 3rd Edition by Anthony T. Cope, Michael A. Broihahn, Wendy L. Pirie, Elaine Henry, Thomas R. Robinson

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

CHAPTER 5

UNDERSTANDING BALANCE SHEETS

Elaine Henry, CFA

Thomas R. Robinson, CFA

LEARNING OUTCOMES

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

  • describe the elements of the balance sheet: assets, liabilities, and equity;
  • describe uses and limitations of the balance sheet in financial analysis;
  • describe alternative formats of balance sheet presentation;
  • distinguish between current and non-current assets, and current and non-current liabilities;
  • describe different types of assets and liabilities and the measurement bases of each;
  • describe the components of shareholders' equity;
  • convert balance sheets to common-size balance sheets and interpret common-size balance sheets;
  • calculate and interpret liquidity and solvency ratios.

1. INTRODUCTION

The balance sheet provides information on a company's resources (assets) and its sources of capital (equity and liabilities/debt). This information helps an analyst assess a company's ability to pay for its near-term operating needs, meet future debt obligations, and make distributions to owners. The basic equation underlying the balance sheet is Assets = Liabilities + Equity.

Analysts should be aware that different items of assets and liabilities may be measured differently. For example, some items are measured at historical cost or a variation thereof and others at fair value.1 An understanding of the measurement issues will facilitate analysis. The balance sheet measurement issues are, of course, closely linked to ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required