ASSETS LIABILITIES

[savio13]

Current Assets Current Liabilities
Cash $ 2,100 Notes Payable $ 5,000
Petty Cash 100 Accounts Payable 35,900
Temporary Investments 10,000 Wages Payable 8,500
Accounts Receivable - net 40,500 Interest Payable 2,900
Inventory 31,000 Taxes Payable 6,100
Supplies 3,800 Warranty Liability 1,100
Prepaid Insurance 1,500 Unearned Revenues 1,500
Total Current Assets 89,000 Total Current Liabilities 61,000
-
Investments 36,000 Long-term Liabilities
Notes Payable 20,000
Property, Plant & Equipment Bonds Payable 400,000
Land 5,500 Total Long-term Liabilities 420,000
Land Improvements 6,500
Buildings 180,000
Equipment 201,000 Total Liabilities 481,000
Less: Accum Depreciation (56,000)
Prop, Plant & Equip - net 337,000
-
Intangible Assets STOCKHOLDERS' EQUITY
Goodwill 105,000 Common Stock 110,000
Trade Names 200,000 Retained Earnings 229,000
Total Intangible Assets 305,000 Less: Treasury Stock (50,000)
Total Stockholders' Equity 289,000
Other Assets 3,000
-
Total Assets $770,000 Total Liabilities & Stockholders' Equity $770,000





To learn more about the balance sheet, go to Explanation of Balance Sheet, Drills for Balance Sheet, and Crossword Puzzle for Balance Sheet.




1b. Common–Size Balance Sheet

One technique in financial statement analysis is known as vertical analysis. Vertical analysis results in common-size financial statements. A common-size balance sheet is a balance sheet where every dollar amount has been restated to be a percentage of total assets. We will illustrate this by taking Example Company's balance sheet (shown above) and divide each item by the total asset amount $770,000. The result is the following common-size balance sheet for Example Company:




Example Company
Balance Sheet
December 31, 2005


ASSETS LIABILITIES
Current Assets Current Liabilities
Cash 0.3% Notes Payable 0.6%
Petty Cash 0.0% Accounts Payable 4.7%
Temporary Investments 1.3% Wages Payable 1.1%
Accounts Receivable - net 5.3% Interest Payable 0.4%
Inventory 4.0% Taxes Payable 0.8%
Supplies 0.5% Warranty Liability 0.1%
Prepaid Insurance 0.2% Unearned Revenues 0.2%
Total Current Assets 11.6% Total Current Liabilities 7.9%
-
Investments 4.7% Long-term Liabilities
Notes Payable 2.6%
Property, Plant & Equipment Bonds Payable 52.0%
Land 0.7% Total Long-term Liabilities 54.6%
Land Improvements 0.8%
Buildings 23.4%
Equipment 26.1% Total Liabilities 62.5%
Less: Accum Depreciation (7.3%)
Prop, Plant & Equip - net 43.7%
-
Intangible Assets STOCKHOLDERS' EQUITY
Goodwill 13.6% Common Stock 14.3%
Trade Names 26.0% Retained Earnings 29.7%
Total Intangible Assets 39.6% Less: Treasury Stock (6.5%)
Total Stockholders' Equity 37.5%
Other Assets 0.4%
-
Total Assets 100.0% Total Liabilities & Stockholders' Equity 100.0%





The benefit of a common-size balance sheet is that an item can be compared to a similar item of another company regardless of the size of the companies. A company can also compare its percentages to the industry's average percentages. For example, a company with Inventory at 4.0% of total assets can look to its industry statistics to see if its percentage is reasonable. (Industry percentages might be available from an industry association, library reference desks, and from bankers. Generally banks have memberships in Robert Morris Associates, an organization that collects and distributes statistics by industry.) A common-size balance sheet also allows two businesspersons to compare the magnitude of a balance sheet item without either one revealing the actual dollar amounts.

1c. Financial Ratios Based on the Balance Sheet

Financial statement analysis includes financial ratios. Here are three financial ratios that are based solely on current asset and current liability amounts appearing on a company's balance sheet:



Financial Ratio


How to Calculate It What It Tells You
Working Capital =

=

= Current Assets – Current Liabilities

$89,000 – $61,000

$28,000 An indicator of whether the company will be able to meet its current obligations (pay its bills, meet its payroll, make a loan payment, etc.) If a company has current assets exactly equal to current liabilities, it has no working capital. The greater the amount of working capital the more likely it will be able to make its payments on time.
Current Ratio =

=

= Current Assets ÷ Current Liabilities