Hello, this is Bob Salvin, the host of the AIChE e- learning course Economic Evaluation for Chemical Engineers.
In this series of short videos we are going to discuss financial statements,
this being part 1 on the Balance Sheet.
Financial statements are the reports that a company will issue on a quarterly and fiscal year-end basis
for describing its financial situation and performance for that particular reporting period.
There are three major reporting statements: the balance sheet,
the income statement, and the cash flow statement. These three statements work together hand in hand.
They also must adhere to an accounting system known as GAPP or
Generally Accepted Accounting Principles. This system was put in place to ensure that
from period to period and among all companies, the terms that are used are defined in the same way,
and these reports are subject to external audit to ensure that they do adhere to the GAPP system.
So let's take a look at the Balance Sheet and some of the major balance sheet items.
We'll begin with the asset side. Assets will include cash;
accounts receivables, or the money that is owed to the company from its customers for
goods and services that it has purchased but has not yet paid for;
inventories, such as raw materials and finished goods; the fixed assets, or property, plant and equipment (PP&E);
investments of the company may have made; as well as some other intangibles. We'll also see when we go through an example that there are
other categories for assets which we will not discuss here, but I would refer you to an accounting text
to get a better understanding of what those items are.
The liability side will include accounts payables; this is the money that the company owes to its suppliers for
goods and services it has purchased but has not yet paid for; any short and long term debt; plus
any other commitments that the company may have made.
And finally we get to a concept known as stockholder's equity. Stockholder's equity will include the stock that
forms the com equity structure of the company; it's usually put on the balance sheet at par value;
any additional paid in capital; this would be the investments that were made above the par value in the stock;
and it will also include a concept known as retained earnings,
which is a portion of the net income which is set aside for use in the business.
The concept of the balance sheet comes from the fact that the assets
must equal the sum of the liabilities and stockholders equity,
and we'll see that again in our example.
Before we begin, though, I want to bring up the concept of depreciation; this is a very important one that
will show up here in our balance sheet discussion as well as later on in our discussion on income and cash flow.
Depreciation is a noncash measure that reflects the actual use of an asset.
Assets are assumed to have a finite life; each asset may have a different life.
The depreciation will began when an asset is finally placed into service and you take a charge for that particular reporting period
for the use of that asset. And as I noted, this number will affect the earnings when we look at the income statement in a future video,
and is the reported value for the assets that are shown on the balance sheet.
The example I have chosen to show you is the balance sheet for the Dow Chemical Company, a major U.S. corporation, for the year ending 2014,
that's the calendar year 2014; for Dow the fiscal year is a calendar year basis.
Just a few things before we began. You can see that Dow has put two years on the balance sheet; this makes it a little bit easier for you to
make a comparison of between 2013 and 2014, and all the numbers and are being shown in millions of dollars.
The asset side of the balance sheet will begin with current assets. Current assets will include
things like the cash that we talked about, accounts receivables, inventories,
and you can see for Dow the total of these numbers is a little over $24 billion, slightly lower than the the year prior but not too different.
Let's then turn our attention to the next section which are the investments Dow has made
in various items such as affiliates that they don't consolidate into their own numbers,
and we can see that number is fairly significant at a little bit over $7 billion.
The next part of the balance sheet is something that we should be familiar with.
This is known as PP&E or property, plant, and equipment. Dow has chosen to call it just simply property.
This section of the balance sheet will show basically two numbers: the investments that Dow has made in the fixed assets
which is $55 billion, and then as we've noted, you're going to take this depreciation charge as accumulated from the time the assets
have been placed in service and you get down to a net property number, and in the case for Dow, that's around $18 billion.
The final section of the asset side of the balance sheet are the other assets.
And we can see a line item for goodwill which is the largest number on there. And there are some other specific items to Dow,
and then there are some other items that you will see on most balance sheets, and again I would refer each an accounting text
and the notes to the financial statements if you want to learn a little bit more about what these other items are.
The total, then, for Dow's asset side is around $68.8 billion.
Let's move on to the liability side of the balance sheet, the liability and equity side of the balance sheet.
And the corollary to current assets is current liabilities,
and the corollary to current assets is current liabilities
and you can see that total is around $11.6 billion and it will include such items as notes payable,
these are short term borrowings that the company has made and is owed fairly quickly;
some long-term debt which is due in one year and of course the large item of
accounts payables that we had discussed earlier, the money that the company owes to its suppliers;
and again there are some other items that we're not going to get into here. The next of major item of course is the long-term debt
and for Dow's case it's around $19 billion, $18.8 billion, and it's up about $2 billion from the year before.
And will see that later on we discuss the cash flow statement as a source of cash, that additional debt that it has taken on.
There is another section, now, known as noncurrent liabilities; we're not going to get into these.
Again some of these are specific to Dow, and that number is fairly significant again, at $14.8 billion.
Dow then goes into showing the stockholders' equity portion of the balance sheet.
These are the investments that have been made in the company. We can see some preferred stock; we can see the common stock at
par value, the additional paid-in capital, and the retained earnings; there are some subtractions again but we're not going to get into those details.
But you can see the total equity side is around $23.4 billion.
And then if you add the liabilities together with the equity, again the concept of the balance comes in,
and you can see that number of 68.8 billion; if you recall the asset total is exactly the same.
Before we close out our discussion of the balance sheet I want to introduce to you the concept of working capital.
Working capital is a key financial liquidity metric which reflects a company's ability to do business on an ongoing basis.
You need sufficient working capital to be able to operate, to be able to buy raw materials, to be able to pay your labor,
and do the things that you need to do. We can derive the amount of working capital by subtracting current liabilities from
the current assets that are shown on the balance sheet.
And if you recall the numbers for Dow, the current assets were around $24 billion and the current liabilities around 12, leaving them with
a working capital position of about $12 billion which seems to be fairly comfortable for a company the size of Dow.
This brings us to the end of this video on the balance sheet. Hopefully you now have a better
understanding of what the balance sheet is and what is contained in it.
If you want to learn about the other two major financial statements, the income statement and the cash flow statement, please visit the other
videos in this series. Once again this is Bob Salvin and I'll be looking forward to having you join me in those videos.