Companies produce a set of financial statements that reflect their business activities and profitability for each accounting period. The three main financial statements are the balance sheet, income statement, and statement of cash flows. The cash flow statement shows how well a company is managing its cash to fund its operations and any expansion efforts. In this article, we’ll examine the differences between the balance sheet and the income statement.
Balance Sheet
The balance sheet shows a company’s assets, liabilities, and shareholders’ equity. Total assets should equal the total of liabilities and shareholders’ equity. The balance sheet shows how a company puts its assets to work and how those assets are financed as listed in the liabilities section. Shareholders’ equity is the difference between assets and liabilities or the money left over for shareholders if all debts were repaid. Investors and creditors analyze the balance sheet to see how a company’s management is putting its resources to work.
To best analyze the key areas of the balance sheet and what they tell us as investors, we’ll look at an example.
Apple Inc. (AAPL)
Below is Apple’s balance sheet, as of the end of the fiscal year for 2017, from their annual 10K statement.
Current Assets
The top section contains the current assets which are short-term assets that are typically used up in less than one year.
- Total current assets were 128.6 billion for the end of their fiscal year (highlighted in blue).
- Cash totaled over $20 billion.
- Marketable securities are short-term investments which totaled $54 billion.
- Accounts receivable, totaling $17.8 billion, is money owed to Apple for selling their products and services. A receivable could be due in 30, 60 or even 90 days depending on the terms of the agreement. Investors want to see receivables increase over time since it indicates increases in sales. However, we don’t want to see aging receivables.
- Inventories of $4.8 billion might be raw materials or supplies used in making their products or finished goods waiting to be sold or shipped.
Long-term Assets
Next on the balance sheet are the long-term assets, such as:
- Long-term investments totaled $194.7 billion
- Property, plant, and equipment totaled $33.7 billion and are called fixed assets because they’re not consumed within one year and are used to generate revenue for the company over the long-term.
- Other assets and intangible assets, which include trademarks and intellectual capital round out the asset section.
- Total assets for Apple was $375 billion for the end of their fiscal year in 2017.
Current Liabilities
Current liabilities are short-term liabilities for Apple that are due within one year and include:
- Current liabilities totaled $100 billion (highlighted in purple).
- Accounts payable were $49 billion and are short-term debt owed by Apple to its suppliers.
- Accrued expenses of $25.7 billion are expenses that have yet to be paid, but have a high probability of being paid.
Long-term Liabilities
Not all of the long-term liabilities are broken out for Apple, but they typically include:
- Debt including long-term debt and B…