How to Read a Balance Sheet?
Welcome to Professor Savings. We teach finance basics
Hi I’m your host today Rayfil Wong
Today We will learn about how to read a balance sheet.
Understanding balance sheets helps you understand financial health of a company you can find a balance sheet in the annual report let’s say that you invest in Unicorn Inc., they sell plush toys.
let’s look at a balance sheet broken into two basics parts.
Assets, what they own. Liabilities, what they owe.
let’s start with assets column, cash.
some company have a lot of cash . So they will likely lend it and earn interest.
Leaving money in a vault will not help you earn any extra income.
Account receivable are money owed to the company such as invoices that are not paid yet.
Companies also have investments such as stocks and bonds and they belong in a column.
Property and equipment includes office furniture, machinery, computers. real estate.
On the other end, there are liabilities. This is simply what the company owes.
Start with account payable. Let’s say a company places orders to purchase things for the business.
they money owed is the accounts payable accured compensation are $ that company must pay employees a great example are pension plans for those who retire.
Income tax payable simply a company makes a profit and these are reserves to pay income tax.
Dividends payable is when some companies have dividend that pay part of the profit to share holders.
Warning signs to look out for if receivables grow faster than sales. This may be sign a a company may be having issues.
Remember, unhappy customers may result in slower payments.
So I hope today you learn how to read the basics of a balance sheet.
Not that hard right?