Introduction to Corporate Balance Sheets
If you are going to invest, it helps to have an understanding of some of the financial reports companies prepare regularly to describe the state of their business.
A good report to start with is the Balance Sheet. Have you ever wondered why it is called that? Do you know what is supposed to "balance" and why that is important? Do you know where to find it?
The balance sheet balances a list of what a company owns (it's assets), against what it owes (It's liabilities and stockholders equity) On a Balance sheet, you will see the information broken down into those three categories. A Balance sheet "balances" because the totals in the three categories satisfy this equation:
Assets=Liabilities + Stockholders Equity
Assets are things like cash in bank accounts, Accounts Receivable, Inventory, and Property, Plant and Equipment. Liabilities are things like Accounts Payable, Bonds payable and Notes payable. Stockholders Equity is the amount of the assets that belong to the owners of the company (which includes your investment club, as a stockholder).
The balance sheet is a snapshot of a companies financial status at a particular point in time. Companies must include a balance sheet each quarter when they report their earnings. Changes in a balance sheet from year to year or even quarter to quarter can tell you a story about how the company you have invested in is being managed.
Here's a suggestion for something you might do at a club meeting to help you start to learn about balance sheets. Why don't you look up a balance sheet for one of the companies you have invested in or for one you are considering investing in?
You can find them by going to finance.yahoo.com and selecting "SEC Filings" in the "Company" section in the left hand column. Balance sheets are included in quarterly filings which are called 10-Q reports and annual filings which are called 10-K reports.
Once you have found a balance sheet, look it over. See if you can see the three sections (Assets, Liabilities and Shareholders Equity) Find the totals for each of the three sections. Does the balance sheet balance? Do Assets=Liabilities+Shareholders Equity?
Typically, at least two reporting period results are shown for you to compare. What differences do you see in the different accounts from time period to time period? Does anything jump out at you as a big change? What kind of questions does that bring up that you'd like to ask? Go ahead and ask them on Club Cafe or by emailing us at email@example.com. The answers are sure to help you learn something else new and might even bring up something it will be important to consider as an investor or potential investor.
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