A balance sheet shows the assets, liabilities and available capital a business has according to a specific date, such as the last day of the year. Understanding what is contained in the balance sheet is very important to gaining perspective on the kind of value a company offers shareholders who are considering investing. The balance sheet gives us information to know whether a company is able to fund its own growth over the short and medium term, or whether it will need to seetk other available options such as acquiring greater debt, selling debt and or creating more issues of its own company stock in order to keep its operations going. A balance sheet can also point to potential problems or weaknesses in a company's finances. For example, it can expose whether a company has too much inventory, for example, or if it is not receiving its payments in a timely enough fashion in order to keep operations going. The balance sheet gives all this information and more as it lists all the current Assets and Liabilities a company possesses.
There are several key areas of the balance sheet worth considering in greater depth. The first of these for our discussion is Current Assets. Current Assets are all the assets that the company is able to access on its own and that are either liquid or can be turned liquid with relative ease within one cycle of its business operations. (Barton & Simko 2002) A cycle of operations typically can take from approximately 60 – 180 calendar days and is the time required to sell product and receive cash.(Barton & Simko, 2002)
Cash & Equvalents are the most liquid form of asset on the balance sheet. It is the amount of ready cash a business has on hand in order to fund operations. Above this level of liquidity is Short Term Investments. Short Term Investments are investments a company makes
when it has excess cash reserves and wishes to capitalize on this liqudity. Cash & Equivaelents and Short Term Investments are signals for the investor that a company projects a healthy profile. Excess cash or relatively liquid cash can be used to increase the value of the stock by buying shares back if it wishes, for example. (Barton & Simko, 2002) Accounts Recievable or A/R is the money that is owed to a company on its books but has not been received yet. A/R is money set to be billed or still in the billing stage at the time the figures are compiled. Another form of asset that Ford has but not all companies necessarily share is Inventories. As an automobile manufacturer, Ford Motor necessarily will have available stock or inventories. Balance sheets with high inventories are often seen as problematic because inventories tie up capital that a company has at its disposal. The next section of the balance sheet covers liabilities. Current Liabilities are considered short-term debts and are typically what a company uses its cash-on-hand to pay for over a fiscal year. These are the immediate financial obligations that a company has to its suppliers or other creditors (Barton & Simko, 2002). Categories in Current Liabilities include accrued expenses, accounts payable and short term notes payable. Accrued expenses are the bills a company has generated from its operations that it still needs to pay. Accounts payable are any balances on accounts that it still needs to pay.
The final section of the balance sheet comprises debt and equity. This section inlcudes several items which can be considered company debt in the sense that they are liabilities that will take more than a year to come due. They may also be assets in which it is difficult to convert them into cash.
Ford Motor Company and Major Industry Competitors, Key Financial Ratios for FY 2012
Now we turn the discussion to a summary of some available financial ratios that may be calculated from the balance sheet. Here we use Ford Motor Company's (2012) 10-K filing at the main balance sheet we consider. We also compare these values to industry standards as can be seen in Table 1. To begin, one financial ratio is Net Working Capital. This ratio simply presents the available capital on hand for a business. It is calculated as current assets subtracted from current liabilities. As can be seen above, Ford's NWC is 68,666, less than that of its Asian competitors but higher than GM. Current Ratio is a measure of how much liquidity a company has. Ford's 1.94 is a strong representation according to industry standards. Quick ratio tests liquidity without the interference of inventories and forecasts how a strong a company is able to meet their short-term financial needs. Ford leads in this category with a ratio of 1.83 compared to inudstry ranges of 0.78, 0.51.and 0.8. Ford's cash position looked strong up until now, the whopping 4.16 figure indicates much of its cash may be coming from shareholder debt. Last is inventory as a percentage of total assets, of which Ford appears within a relatively normal range.
References
Carmona, J.L. (2013). Ford Motor Co. at a glance. Caribbean Business, 41(9), 16.
EBSCohost
Barton, J., & Simko, P. J. (2002). The balance sheet as an earnings management constraint. The accounting review, 77(s-1), 1-27.
Ford Motor Company (2012). Form 10-K 2012. Retrieved from Gale Business Insights database.
GM (2012). Form 10-K 2012. Retrieved from Gale Business Insights database.
Honda (2012). Form 10-K 2012. Retrieved from Gale Business Insights database.
Toyota (2012). Form 10-K 2012. Retrieved from Gale Business Insights Database.
