Interpreting Financial Statements

The Balance Sheet

The balance sheet provides a snapshot of an organization’s financial strength at an exact date. This snapshot will itemize assets and detail whether they are financed via debt or equity. The balance sheet should be compared with the balance sheet from different time periods to spot positive and negative trends. It is important to note that the asset side of the balance sheet must equal the liabilities/equity side of the balance sheet, the items in the assets side of the balance sheet will be listed in order of liquidity (or ease of converting into cash), and the liabilities will be listed from short-term to longer term. You can instantly tell how leveraged an organization is by looking at its balance sheet. If you keep in mind the fundamental accounting equation (Assets = Liabilities + Equity), then you will understand that when more assets are derived from liabilities (or debt) then the organization is borrowing more.