There are three main financial statements published in the annual report. They are the income statement, balance sheet and cash flow statement. Each statement provides the analyst with a different set of information about company operations. The balance sheet is used to provide an overview of company assets, liabilities and stockholders' equity.
Balance Sheet Equation
The balance sheet equation is assets equal liabilities plus stockholders' equity. If a company has no debt it means assets are paid for with stockholders' equity. However, if the company has no stockholders' equity it means company assets are paid for with all debt. These are extreme cases. In actuality, companies usually have a mixture of both debt and equity. Most investors prefer a company with more equity than debt.
Assets
The first section in the balance sheet provides line-item detail about company assets. Short-term assets are referred to as current assets. Current assets are assets that will be used or sold within the year. Common current assets include accounts receivables and inventory. Long-term assets are listed just after current assets and include assets that will provide value to the company over a period of longer than one year. Common long-term assets are property, plant and equipment.
Liabilities
The next section in the balance sheet is liabilities. Liabilities must be paid back and are therefore an obligation on future earnings. Most investors do not like a company with a high level of liabilities compared to equity. Like assets, liabilities are split between current and long-term liabilities. Current liabilities are liabilities that will be paid off within the year like accounts payable. Long-term liabilities include bank debt, or capital bonds.
Stockholders' Equity
The last section on the balance sheet is referred to as stockholders' equity. It provides a listing of all the equity in the firm. These are funds that do not have to be paid back. The most common equity accounts include funds from investors in stock and retained earnings. Retained earnings are earnings that are not distributed to stockholders in the form of interest or dividends.
