Apple Balance Sheet Excess Cash Invested Capital Adjustment New Constructs
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So what is the purpose of a balance sheet? First business owners use balance sheets in order to analyze the strength and capabilities of their business. For example is the business ready to expand? Or should the business take immediate steps to strengthen cash reserves? Also balance sheets describe trends especially in the area of accounts receivables and payables. For instance is debt in payables being paid and is debt in receivables being received in a reasonable amount of time. Finally balance sheets are examined by banks investors and vendors to determine the amount of credit they will give the entity.
In order to make your statements comply with these rules and to give them an air of authority you will have to hire a Certified Public Accountant or C.P.A. and have them compile review or audit your financial statements. What this means is that the C.P.A. takes your statements and then makes some cosmetic changes in order to present them in the form proscribed by US Generally Accepted Accounting Principles or if appropriate one of a number of alternate forms and then issues an opinion on them. The opinion will vary depending upon the type of engagement you hired them to do. The standard opinion for a compilation is "we took this pile of crap and made it pretty but we re not saying that it makes any sense" while the standard opinion for an audit is "sure we took a look and everything seems OK but please don t sue us if we re wrong!" while a review falls between the two.
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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".