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There is no doubt that balance sheet analysis is an important thing to be done in finance and this is helpful for the financial institutions, investors, share brokers, investment bankers, and other stake holders as well. This analysis will assist stakeholders to verify that company is doing well and make investment decision. This review will reflect the financial health of the company and comparative analysis of balance delivers an over-all hint of performance of the company.
- The very first thing we look in the balance sheet is total assets and capital. Total assets comprise of fixed assets and current assets. It represents a huge figure in balance sheet. If we look at the balance sheet of Exxon Mobile then we can see that in 2012 total asset of the company is $333,795 million out of which current assets is $64,460 million and remaining figure represents fixed assets. Both current assets and fixed asset is important for the company. Both of these assets adds value to the company. It also serves as an important factor for company to manage the financing sources because many investors decide whether or not to grant loan to company based on total assets as well. Having sufficient assets also help in reducing the risk of the business. As for example, when one have fixed assets like computer, then company can minimize the risk of losing company records and increase efficiency. Having intangible assets like patents and copyrights can protect company against competitors. Current assets is important in conducting day to day operations. Current assets are turned over to generate cash for the business like inventories are converted to final product and sold to generate revenues, cash is used to purchase raw materials and pay for wages and raw materials.
- If we look at previous year i.e. 2011 balance sheet of the company then we can see that total asset was $331,052 Million which is $2743 million less than 2012. The total assets increased in 2012 because the company invested huge money in acquiring property, plants and equipment in 2012.
- Till now we discussed about total assets, but if we analyse the balance sheet and look for individual component of assets then, we can see that one of the prominent current assets i.e. cash and cash equivalent sums up to $9,923 million in 2012. This includes cash and cash equivalent and restricted cash and cash equivalent. According to Weygandt, Kieso, and Kimmel (2003) cash includes cash on hand and demand deposit, whereas cash equivalents are short term, highly liquid investments that are readily convertible to known amount of cash. Norton, Diamond, &Pagach (2006) has clarified that restricted cash and cash equivalents are those cash and cash equivalents that a company keeps aside for separate purpose like dividends, facility expansion and other purposes and such restricted cash and cash equivalents cannot be used for other purpose other than stated purpose.
- When we go deeper inside the balance sheet, then we can find important element known as accounts payable. The company had accounts payable of $50,728 million in 2012 which was $ 57,067 at the end of previous annual reporting period i.e. 2011. The reason for such decrement in accounts payable is that the company have settled their outstanding liabilities in year 2012 by paying those liabilities to the creditors and this can be seen in cash flow statement.
- Income statement is also an important financial statement. It shows the total income and expenditure of the company. By going through the income statement, one can find the sources of company’s revenue and where the money is spent. It helps to identify the area in which huge amount of revenue is being spent and take corrective actions if required. The income statement of Exxon Mobile shows that the net income of the company in 2010 was $ 30,460 million which increased to $ 41,060 million in 2011 and it increased by 9.3% in 2012 and reached to $44,880 million. In 2012, the net income increased by $3,820 million as compared to 2011. If we compare 2010 and 2011 income statement then we can see that in 2011 both revenue and expenditure has increased leading to increase in net income but comparison of 2011 and 2012 shows that even though revenue was decreased in 2012, net income has increased and this is due to decrease in expenditure in 2012 as compared to 2011.
The total current asset of most recent annual reporting period as on 31st December, 2012 is $64,460 million. This figure includes sum of cash and cash equivalents, notes and account receivables, inventories, and other current assets.The total current assets of previous annual reporting period as on 31st December, 2011 are $72,963 million. This had greater figures of cash, notes, and accounts payable, inventories as compared to recent annual reporting.
All the information above is equally important for all the stakeholders of company. The total asset position illustrates the company’s potential to invest and perform in future. This helps to identify the current aspects of company’s strength over the liability they hold. On the other hand, cash in hand reflects company’s liquidity position with sufficient cash to support the future cash needs of the organization. The aspect of revenue illustrates the overall performance of the company, and its operative quality. The current assets position illustrates that if company is able to finance its short term cash needs through its short term assets. Thus, investors focus is on the better return through their investors, thus they work for their level best to achieve the desired future position. The employees need to know about the current financial position of the company to secure their jobs and career path. The other stakeholders also need to know about the company to understand its financial health and maintain transactions according to it. Such stakeholders can be: the creditors, the debtors of the company, who have major concern of the financial health of the company. On the other hand, the lending institutions such as banks and other lending institute also must know about its financial position to secure their debt and to keep further relationship with the client in future. Thus, these information are important to all the investors, employees, and so forth for the organization.
References
Norton, C. L., Diamond, M. A., &Pagach, D. P. (2006). Cash and Receivables. InIntermediate accounting: Financial reporting and analysis (p. 302). Boston: Houghton Mifflin Co.
Weygandt, J., Kieso, D., & Kimmel, P. (2003). Financial Accounting. New York, NY: Wiley.
