Balance Sheet Analysis Techniques

Balance Sheet Analysis Techniques

CPI: Understanding Consumer Price Index  statement which reports financial information over a period of time, a Balance Sheet depicts the fiscal health of a company at a single point in time. This makes it important to understand how the different items on a Balance Sheet are derived and what they mean for the company.

A Balance Sheet explains what a business owns (assets) and owes (liabilities). It is a snapshot of the financial condition of a company on a given day, and it can be used by banks, lenders, investors, and other parties to gauge a company’s risk, liquidity, and solvency.

To calculate net worth from a Balance Sheet, you subtract total liabilities from total assets. Assets include any item with a quantifiable value owned by the company, such as inventory, accounts receivable, plant and equipment, and intangible assets. Liabilities consist of money owed to others, such as payroll and debt payments, rent and utility expenses, taxes owing, and bonds payable. Efficient management of these major account types is key to a company’s overall health.

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In order to assess a company’s financial position, it is important to look at its Balance Sheet in comparison to similar businesses within the same industry. One way to do this is by using a Balance Sheet analysis tool called a vertical analysis. A vertical analysis converts the different account balances on a Balance Sheet into percentages, making it easier to identify trends and relative proportions of accounts.

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