Tuesday, June 26, 2012

What is the purpose of a Balance Sheet? What information does it provide?

The balance sheet is a picture of the company’s assets, liabilities, and stockholders’ equity at a specific point in time. The balance sheet helps in determining important information to the stakeholders of an organization. In the book Financial Accounting Tools for Business Decision Making, Kimmel shows the importance by explaining solvency, liquidity, and profitability. Kimmel defines a company’s solvency as, “The ability to pay interest as it comes due and to repay the balance of a debt due at its maturity” (Kimmel, 2011). He goes on to define liquidity as, “The ability to pay obligations expected to become due within the next year or operating cycle” (Kimmel, 2011).

Determining the profitability of a company for comparative analysis is difficult without knowing the net income which is found on the income statement and the average number of common stock shares outstanding. The balance sheet’s purpose in determining profitability is to provide the value of what the common stock is worth at a specific point in time.

Kimmel, P., Weygandt, J. & Kieso, D. (2011). Financial accounting tools for business decision making. Danvers, MA: John Wiley & Sons, Inc.

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