The balance sheet is sometimes called the Statement of Financial Position or Statement of Financial Condition. It provides a snapshot of the firm’s financial position at a specific moment in time. The balance sheet lists a firm’s assets (or resources) and claims against those assets. The two basic types of claims are liabilities (to creditors) and equity (of owners).
The balance sheet gets its name from the basic accounting equation Assets = Claims, or more specifically Assets = Liabilities + Equity. Each side of the equation is typically listed in the same order of liquidity, or likelihood of being converted to cash. Under U.S. GAAP, cash is usually the first asset listed, followed by other current assets. There are exceptions, however. For example, utilities commonly list fixed assets before current assets. International Accounting Standard (IAS) 1, Presentation of Financial Statements, does not prescribe a particular order or format. Some companies reporting under IAS also list fixed assets before current assets.
Credit analysts are concerned about the company’s ability to repay its debt. The balance sheet provides information regarding the amount of debt, when it is due, and the assets available to repay it. Equity investors are concerned with the company’s ability to generate future cash flows and make distributions to owners. The balance sheet provides essential information regarding the company’s health and ability to generate cash flows. However, the balance sheet is just one piece of the puzzle. The other financial statements (income statement, statement of cash flows, and statement of owners’ equity) are all integral to evaluating whether a company is worthy of investment.
A balance sheet may be presented in either the account format or the report format. In the account format, the balance sheet is reported with assets on the left side and claims on the right. In the report format, the balance sheet is reported with assets on top and claims on the bottom. An example can be found in Apple’s 2020 10-K report.
Apple presents the balance sheet for the previous two years in reverse chronological order from left to right. Some companies present the years report in chronological order. Particularly when comparing different companies it is important to pay attention to the order in which data are presented.
From the balance sheet, we can quickly glean that Apple’s current assets (those that can be converted to cash in less than 1 year) have declined. However, they remain well above the level of current liabilities, suggesting that Apple has ample liquidity to conduct its business. Shareholders’ equity also declined, largely due to a reduction in retained earnings. This was likely due to paying more in dividends and share repurchases than was earned as income during the year, a hypothesis that can be confirmed by examining the company’s statement of owners’ equity.