balance sheet assignment help

balance sheet assignment help

The Importance of Balance Sheet Analysis

1. Introduction

A coherent, concise and diverse balance sheet is important for understanding the financial health of a business. For all these reasons and more, the process of studying the health of a business has become more popular over time. In finance, one of the most important areas is the understanding of the financial accounts of a business and being able to interpret the information in these accounts to assist with decision-making. The analysis of the financial position and performance of a firm has got to be a logical, consistent and structured process. However, there has been much criticism of the current process – especially the fact that it appears to be a static process with no real direction or scope. Critics of the current process argue that financial analysis is too one-dimensional – for example, a recent report issued by the Association for Accountancy and Business Affairs states that “Accountancy does not serve the general public. It serves itself and keeps the companies and financial institutions that pay its wages very happy. It’s about time it started to give something back to society.” Based on this kind of criticism, it is claimed that the value and worthwhileness of financial analysis is minimal. However, this is not the case. A thorough analysis offers no real benefits over a broad analysis. But if financial analysis is expanded on, to include the business environment and strategy – which is suggested in this essay – the benefit of being able to do it properly is increased.

2. Understanding the Balance Sheet

The balance sheet is a complex document that summarizes a company’s financial position. It goes by many names – statement of financial position, the statement of operations, or the statement of financial condition. It comprises three main areas: assets, liabilities, and equity. Assets are ordered by how soon they can be converted into cash, with the most liquid assets at the top. They are usually divided into current and non-current assets. Current assets are assets that are expected to be converted into cash within a year. They include things like cash, accounts receivable, and inventory. Non-current assets are assets that are not expected to be converted into cash, sold or consumed within a year. Examples of non-current assets include property, plant, and equipment, intangible assets, and long-term investments. Liabilities are also ordered by due date, with the closest liabilities listed first. Like assets, they are divided into current and non-current liabilities. Current liabilities are those that are due within a year. They include things like accounts payable, wages payable, and taxes payable. Non-current liabilities are those that are not due within a year. They include things like long-term debt and non-current portion of lease liabilities. Finally, equity refers to the part of the business that its owners do not directly own. It’s what’s left over for the owners if all the liabilities are settled. Equity includes share capital, retained earnings, and year-ending adjustments. Of extreme importance when understanding the balance sheet is the fact that everything on it is a ‘snapshot’ of the financial position of the organization at a particular point in time. This is in contrast to a document like the cash flow statement, which provides a summary over a certain period of time. This means that the values of the various components of the balance sheet aren’t just ‘plucked from thin air,’ but are actually positions that have been calculated and re-calculated based on information and transactions as registered by the accountant over time. As such, understanding the balance sheet helps in detection of errors – obvious large discrepancies that are unlikely to be correct – and in verifying the recorded ‘evidence’ for a number of items found in the accounts, such as the cash balance shown in the assets section of the balance sheet.

3. Analyzing the Assets

To delve further into the topic, we discuss analyzing the assets. Assets are resources owned by a business. These are the economic resources which are expected to bring monetary benefit to the business. We analyze the assets part of the balance sheet with an intention of knowing the worth of the company in terms of liquidation and the benefit to the owners. Each and every asset is evaluated on two main grounds, that is the availability of the asset to be converted into cash and the period within which this will happen. These give us the basis of classifying assets into current and fixed assets. Current assets are those that are expected to be fully consumed or converted into cash within the business operating cycle or within one year, while fixed assets are relatively permanent and are held in the business for a relatively longer period. We can also categorize the assets into tangible and intangible assets. Examples of tangible assets include land, buildings, vehicles, machinery, and cash among others. These can easily be checked and represented physically, and they usually have an established market through which they can be disposed. On the other hand, intangible assets are non-physical assets and represent things like copyright, patents, goodwill, trademark, and computer software among others. Intangible assets are not easily transferable into cash but are able to provide long-term benefit to the business. It is important to compare both the fixed assets against the current liabilities on one hand and the total assets against the total liabilities on the other hand, a calculation that yields what we call the liquidity and solvency ratios respectively. If the business is found with a high solvency ratio, this is an indication that it will have no problem in meeting its long-term financial obligation. The higher the ratio, the financially healthier the business is. On the other side, the degree of being near insolvency increases as the ratio decreases. The liquidity ratio on the other hand tries to explain the ability of the business to meet its short-term financial liability as and when they fall due.

4. Evaluating the Liabilities

In terms of liabilities, reference is made to what a company owes and it includes loans, mortgages, and amounts owed to other creditors. One of the first things to note when evaluating the liabilities of a company is the due date of the obligation. Liabilities are split on the balance sheet between current and long term, and this has a major bearing on whether the company is at risk of insolvency or not. Current liabilities are those debts which are payable within one year, while long-term liabilities fall due after one year. It is normal for businesses to have more current liabilities than long term, as the cyclical and day-to-day running costs of the business due and payable within one year will naturally generate a larger amount of debts. One method of evaluating the financial performance of a company is to look at the relationship between capital and long-term liabilities. This is often done through a gearing ratio. This is not a topic that is easily understood and can be a challenging area of finance for some students and learners. Nevertheless, balance sheet analysis can provide both useful and important information, and the skill of being able to understand and interpret the information is invaluable to anyone who has a role in making commercial decisions and is interested in the performance and efficiency of a company. A critical part of balance sheet analysis is in using the data that is available. This data can be used not just for the academic exercise of producing ratios and completing coursework or analysis of a particular company – but also in the wider context of understanding how a particular company may be understood and valued by potential investors or buyers. It also provides an important insight into how both historic and future changes in the performance and position of a company can be detected through the use of the key ratios and how these can be used to adapt and plan for the future. The discipline of considering financial information and using it in this way is generally known as financial analysis. It focuses on understanding and interpreting the figures that are presented in a balance sheet and it provides the user with an enhanced appreciation of both the financial position and overall financial performance of the entity.

5. Interpreting the Financial Health

This section will provide an insight and necessary examples on how to interpret, otherwise referred to as, the financial status of a company from a balance sheet. The main idea in starting to develop your judgment on analyzing a balance sheet is usually the better performing businesses. Normally, in the business world, we can quickly agree that those managers who maintain a healthy and consistently high performing business usually show their balance sheets. It is critical, therefore, that any person operating with a balance sheet should be able to interpret it to some extent of accuracy and understand what it presents and what it does not. Balance sheets cannot completely show the net worth of a company. They are based on so many underlying factors. This concurs with what most surveys end up with. Mostly, it’s really recommended that when the name of a company is selected in this context, you should go for the most reputable, the simplest, and has regular period end balances. There are mainly three things which should quickly and directly trace the attention of any interpreter, no matter what doesn’t trace the attention. The heading of the balance sheet, mostly the name of the corporation in the balance sheet, and the balance sheet date. These form a convenient way of finding out if the balance sheet is not only standard but also whether it belongs to the company you are interested in and whether this date is reflecting the most recent or any desired balance sheet updates. It is critical to understand the layout for you to quickly know where liability, equity, and assets are shown in the balance sheet. Mostly, the assets will be on the right-hand side and they’ll be categorized in the order of liquidity. This means that those which will be readily converted into cash will be listed higher. Also, if any asset is dependent on another asset, it will follow the respective asset but expressing its net value. Most of the time, the heading of assets and the liability and equity will show a clear separation as compared to components of assets or liabilities. These, for sure, will give a quick guide of what value may be included in the balance sheet. Last but not least, any balance sheet which could be located on the website or when you are interpreting it, it is expected that you should try all your level best to come up with a reasonable conclusion. This can be achieved by finding out the best matches of the reasons stated in the balance sheet to the business around. This will increase clarity and accuracy in the interpretation. The reader may find some vital information for their personal judgment, and most surveys also put emphasis on that. But if the reader also can add or drag other credible issues for the name of the company and the balance sheet period.