ACMMM2017

How to Prepare a Balance Sheet: 5 Steps

Both an annual and 10-K report can help you understand the financial health, status, and goals of a company. While the annual report offers something of a narrative element, including management’s vision for the company, the 10-K report reinforces and expands upon that narrative with more detail. With a cash flow statement, you can see the types of activities that generate cash and use that information to make financial decisions. A detailed reading of the balance sheet is incomplete without quantitative analysis.

In the past, Lita has been a daily newspaper reporter, magazine editor, and fundraiser for the international activities of former President Jimmy Carter through The Carter Center. Balance sheets are important because they give a picture of your company’s financial standing. Before getting a business loan or meeting with potential investors, a company has to provide an up-to-date balance sheet. A potential investor or loan provider wants to see that the company is able to keep payments on time.

Current (Short-Term) Assets

The company then begins to depreciate ( or reduce in value) the asset over time. Inventory stock includes all items a business possesses with the intention of selling, including balance sheets for dummies products currently in stock. Various techniques, such as the first in, first out (FIFO) and last in, first out (LIFO) methods, are used for calculating stock levels.

Likewise, its liabilities may include short-term obligations such as accounts payable and wages payable, or long-term liabilities such as bank loans and other debt obligations. In contrast, the income and cash flow statements reflect a company’s operations for its whole fiscal year—365 days. This practice is referred to as “averaging,” and involves taking the year-end (2019 and 2020) figures—let’s say for total assets—and adding them together, and dividing the total by two. This exercise gives us a rough but useful approximation of a balance sheet amount for the whole year 2020, which is what the income statement number, let’s say net income, represents. In our example, the number for total assets at year-end 2020 would overstate the amount and distort the return on assets ratio (net income/total assets). Although the balance sheet is an invaluable piece of information for investors and analysts, there are some drawbacks.

Balance Sheets Conclusion

An asset is anything a company owns which holds some amount of quantifiable value, meaning that it could be liquidated and turned to cash. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. Below are balance sheet templates that you can use with Microsoft Excel to create one for your business. Organize your assets into two categories — current and fixed — and represent each asset as a line item within the appropriate category.