Balance Sheet Format The Stockholders Equity Section Of The Balance Sheet Financial
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They open them up turn to page one and there is your company laid bare open to them. And they ask you questions; "why is this line a negative number how did you arrive at the valuation of that line what are the terms of this liability." Don t you want to be able to confidently look them in the eye and answer those questions? What Makes Up a Balance Sheet Hopefully you have been exposed to some basic accounting and understand the concepts that some numbers in accounting are recorded as debits and some numbers as credits. These numbers are often represented as positive and negative numbers and the balance sheet as its name suggests must balance i.e. the negative and the positive numbers must total zero.
IFRS now implemented the converse the balance sheet is drawn up first and the income statement now becomes the "rubbish bin"! The balance sheet first method has more to do with accurate reporting than anything else and is supported by many accounting experts. The accounting equation Assets-Liabilities=Equity is the true bottom line not "profits". Capital growth is what any investor should be interested in. Any new business in reality is constructed from its "balance sheet" first. Capital is invested loans are sourced inventory is acquired and a bank account is opened. Only after all of the aforementioned has been established do the business start to generate revenue and incur expenses. Balance sheet auditing Balance sheet items are reviewed meticulously and prepared first. Accountants will audit fixed assets current assets current liabilities loans and investments.
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For most of these kinds of items a company will book their value at whatever was paid for it. While items that depreciate like computers are usually de-valued over a period of time that piece of land will likely appreciate over time and the current value may not be reflected on the balance sheet. This can make the company more valuable than it appears (some value investors refer to these as "asset plays"). For financial companies a ton of assumptions are made on the balance sheet. The actual value of a loan is very difficult to calculate due to variable interest rates risk of default risk of early payment etc. Take that reality and multiply it by the millions of loans a large bank has outstanding and you begin to see why investing in banks is such a difficult and risky endeavor. However since the Magic Formula throws out financial stocks we won t discuss that in much detail here. One other thing to be generally aware of is that both assets and liabilities are categorized as either "current" or "long-term".