Balance sheet is a summary of the financial conditions of an entity, taken at a point of time in the end of the reporting period. It presents a “snapshot” of capital, assets and liabilities and is often used in managerial decision-making, as it gives information on the available and owed resources.
Assets’ value on the balance is comprised of current and non-current assets. Current assets are those assets, which can be used to repay liabilities in a 1 year period. Such assets may be represented by cash and cash equivalents, inventory, receivables, short-term investment and prepaid (deferred) expenses, which will be paid within 12 months.
Fixed (non-current) assets are those assets, which cannot be easily liquidated (converted into cash). Usually fixed assets are tangible, and often refer to property and equipment. The component parts of non- current assets are intangible assets (non-monetary, which cannot be easily seen, such as know-how), property for investment purposes, property, plant and equipment (PP&E), financial assets, investments, calculated using equity method, and biological assets.
Asset valuations on the balance sheet are not easily made, and some of the calculation methods contain inherent problems. Firstly, it is not possible to identify the market or replacement value for assets, since all the valuations are made at cost. Secondly, various methods are available for valuating assets, and they may differ from entity to entity. Thus, inventory value may be calculated differently not only in different companies but also within a firm for different products. Similar issue arises with depreciation and long-term asset valuation. Lastly, balance sheet does not take into account some aspects, such as good employee relationships and degree of innovation. Therefore, data provided in the balance sheet should be always evaluated critically from a qualitative perspective.
Works Cited
Gibson, C.H. (2009). Financial reporting & analysis using financial accounting information . Mason:
South-Western Cengage Learning.
Shim, J.K., & Siegel, J.G. (1999). Financial accounting. Columbus: Mc-Graw-Hill.
Pratt, J. (2011). Financial accounting in an economic context. Danvers: John Wiley& Sons, Inc.
