Financial statements are one of the most reliable data points to assess a company's financial position and performance. Companies listed on the stock exchange provide quarterly financial statements such as, Balance Sheet, Profit and Loss (income) Statement, Statement of Cash flow
Balance Sheet
Basic accounting principles such as assets, liability, equity, income and expenses are linked. The link between these results in basic financial statements.
The balance sheet is the first financial statement you will read. Gives you a summary of the company's financial situation over time.
The three stages of construction of a balance sheet are:
- Assets
- Liability
- Equity
A balance sheet tells you about the financial position of a company at a certain point of time. A typical balance sheet consists of ‘Assets’ on one side and ‘Liability and Equity’ on the other side. The relationship between these elements is called the accounting equation, which is given as:
Total Assets = Total Liability + Total Equity
Assets:
The asset side consists of current assets and non-current assets. You saw that non-current assets include the following line items:
Tangible assets: Assets that have a physical form
Intangible assets: Assets that lack a physical form
Capital work-in-progress: Assets that are still in their development stage
Other assets: Assets such as office vehicles and laptops
Non-current investments: Long-term investments
Long-term loans and advances: Long-term loans given to other companies
Other non-current assets: Capital advances paid by the company
and, Current assets include the following line items:
Current investment: Short-term investments
Inventories: Stocks of unsold products or unused raw materials
Trade receivables: Funds that customers owe the company
Cash and cash equivalent: Hard cash or money in a bank
Short-term loans and advances: Short-term loans given by the company
Other current assets: Other assets that can be converted into cash within a year.
Equity:
Equity (also known as shareholders’ funds) consists of two major line items:
Share capital: Amounts received from the owners or investors of the company.
Retained earnings: Undistributed or accumulated profits of the company over the years. This is also known as reserve and surplus.
Liability: It is what company owes to it's owners, investors.
Non-current liabilities include the following line items:
Long-term borrowings: Long-term loans, usually with a term of 10+ years
Deferred tax liabilities: Tax liabilities to be paid over a few years
Long-term provisions: Created to set aside money for employee benefits such as leave encashments and provident funds
Current liabilities include the following line items:
Short-term borrowings: Bank loans that are due within a 12-month period
Trade payables: Bills against credit purchases made by the company
Other current liabilities: Other liabilities that are due within 12 months.
Short-term provisions: Money set aside to meet short-term liabilities.
**Goodwill can appear as a line item on the balance sheet only if the company pays to receive it as part of the acquisition of the business! If 'goodwill' is produced internally, it cannot be displayed as an asset on the balance sheet.
Service companies (like infosys) don’t have a list of names or ongoing work as a line item. This is because they do not provide tangible products. Instead, they have a line item known as ‘unbilled revenue’, which refers to all ongoing and unfinished work by a service company.
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