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.

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

I agree that the balance sheet informes stakeholders as to the position of the company's debts vs. assets. Business decision makers utilize the balance sheet to determin the value of a corporation. The actual "bottom line" often referred to in the business culture today is the net income or net loss which are found on the income statment. Stackholders want to know how profitable a decision in a company will be, thus how much drops to the "bottom line" of the income statment. The balance sheet is an overall snapshot of the tangible net worth of a corporation. http://www.investopedia.com/terms/b/balancesheet.asp#axzz1u1VMJqKL  This link is to investopedia and provides more information on the purpose of a balance sheet.

Financial Accounting Tools for Business Decision Making

One thing I find interesting about the primary financial statements published by a corporation are how the statements inter-relate. The classification cash used in a balance sheet appears on the statement of cash flows and should be the cash at the bottom of the statement of cash flows. The numbers from the different financial statements provide the story as to how the company is positioned financially and tells us the story of the overall company performance. In the book Financial Accounting Tools for Business Decision Making, Kimmel states, “The debt to total asset ratio is one source of information about long-term debt-paying ability.

It measures the percentage of total financing provided by creditors rather than stockholders… Thus, the higher the percentage of debt financing, the riskier the company” (Kimmel, 2011). This debt to total asset ratio information is only 1 part of the financial picture. What if a company was highly leveraged but was still profitable. Take property management for instance. What if the asset would be profitable even if it was 100% leveraged. Risky? Maybe, but without all the financial statements to determine profitability the business owner would never take that risk. Often times real-estate companies are highly leveraged and still highly profitable. In my opinion not having any equity is an insane decision. Kimmel, P., Weygandt, J. & Kieso, D. (2011). Financial accounting tools for business decision making. Danvers, MA: John Wiley & Sons, Inc.

How is cash-basis accounting different from accrual-basis accounting?

Cash-basis accounting is very different from accrual-basis accounting. One major difference is when the business records revenues and expenses. Cash accounting is used more by very small businesses. These businesses recognize revenues when the business receives cash and recognizes expenses when cash is paid out. In accrual-basis accounting revenues are recognized in the period the revenue is earned or accrued. The expenses are matched to the period in which they help to generate the revenue earned or the expense is actually accrued. Kimmel in his book Financial Accounting Tools for Business Decision Making explains accrued revenues as, “revenues earned but not yet recorded at the statement date” (Kimmel, 2011). He goes on to explain that, “An adjusting entry for accrued revenues results in an increase (a debit_ to an asset account and an increase (a credit) to a revenue account” (Kimmel, 2011). Accrual accounting principles are Generally Accepted Accounting Principal (GAAP). Accrual-basis accounting is the way most U.S businesses record the economic events of the company.

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