Chapter 2 will study the organization, components, purpose and limitations of the
Balance Sheet. After completing this chapter you should be able to explain
how the balance sheet is organized, identify individual components, state
similarities and differences between US GAAP and IFRS, explain how debt and equity
affect financial risk, compute and interpret liquidity and solvency ratios
as well as prepare trends in common size analysis. The balance sheet provides a
snapshot of a company's financial position as of a certain date.
It reports assets and whether those assets are financed with liabilities or
stockholders equity. The balance is used to evaluate liquidity, solvency and
financial flexibility. Liquidity is a measure of how quickly an asset can be
converted to cash. It also measures company's ability to pay its immediate
obligations or all bills that are due within 12 months. Solvency is company's
ability to pay its long-term debt as they become due. Financial flexibility is
the ability of a company to react to unexpected needs and opportunities. The
basic template of a classified balance sheet presents the assets grouped into
5 subgroups which are: Current assets, Long-term investments, Property
plant and equipment, Intangible assets and Other. The liabilities are grouped into
two sub groups: Current and Long-term. In the third section is stockholders equity.
The balance sheet exhibits the accounting equation which states:
Assets = Liabilities + Stockholders equity. As discussing Chapter 1, assets
are items of value the company has a right to use. Liabilities are amounts
owed to creditors and third parties. Stockholders equity is a portion of
assets the owners or shareholders own free and clear of the liabilities.
We will review each section separately. In Chapter 2, we will review the Walt
Disney Company's balance sheet. The presented statement compares fiscal
years 2009 and 2010. We have the statements for two consecutive years so
we can compare the differences. The balance sheet for 2010 presents balances
as of October 2nd 2010. You can see Disney's current assets, non current
assets, current liabilities, non current liabilities and stockholders equity.
Please note that all amounts are in "millions". That will make a difference
when you are comparing a smaller sized company which is expresses its numbers
in "thousands" to a larger sized company which expresses its numbers in "millions".