Balance Sheet

1. List the types of accounts presented on a balance sheet.

2. Explain the difference between current assets and liabilities and noncurrent assets and liabilities.

3. Calculate working capital and the current ratio.

4. Provide the reason for a balance sheet to always balance.

5. Identify the three sections of a statement of cash flows and explain the types of events included in each.

Question: The third financial statement is the balance sheet. If a decision maker studies a company’s balance

sheet (on its Web site, for example), what information can be discovered?

Answer: The primary purpose of a balance sheet is to report an organization’s assets and liabilities at a particular

point in time. The format is quite simple. All assets are listed first—usually in order of liquidity1—followed by

the liabilities. A picture is provided of each future economic benefit owned or controlled by the company (its

assets) as well as its debts (liabilities).

Note that the assets are divided between current (those expected to be used or consumed within the next year) and noncurrent (those

expected to remain within the company for longer than a year). Likewise, liabilities are split between current

(to be paid during the next year) and noncurrent (not to be paid until after the next year). This labeling aids

financial analysis because Davidson Groceries’ current liabilities ($57,000) can be subtracted from its current

assets ($161,000) to arrive at a figure often studied by interested parties known as working capital ($104,000 in

this example). The current assets can also be divided by current liabilities ($161,000/$57,000) to determine the

company’s current ratio (2.82 to 1.00), another figure calculated by many decision makers as a useful measure of

short-term operating strength.

The balance sheet shows the company’s financial condition on one specific date. All the other financial statements

report events occurring over a period of time (often a year or a quarter). The balance sheet discloses assets and

liabilities as of the one specified date.