Reading a Balance Sheet - Free eBook in PDF Format

Book Description - ISBN 978-1-62620-954-1 (35 Pages)
This free eBook you will give you a thorough understanding of the balance sheet, a powerful decision-making tool that every manager should be familiar with.

Chapter 1 - Reading a Balance Sheet
The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any organization's financial statements. The main concept of a balance sheet is that total assets must equal the liabilities plus the equity of the company at a specified time.

Chapter 2 - Balance Sheet - Assets, Liabilities, and Equity
Assets include things like stock/inventory, buildings, equipment, and money owed to the company. Liabilities include money owed by the company to suppliers and its own workers in the form of wages that have not yet been paid. Equity includes net assets, often referred to as shareholder equity, and consists of issued capital and reserves, both controlling interests, as in a parent or holding organization, and non-controlling interest in equity.

Chapter 3 - Assets - Balance Sheet Definition
Current assets include cash and cash equivalents, short-term investments, accounts receivable, and bad debt provision. Inventory includes raw materials, work in process, and finished goods. Prepaid expenses are those things that have been paid in advance like insurance premiums, property taxes, and income tax installments. Property and equipment includes such items as buildings, manufacturing equipment, vehicles, and office equipment.

Chapter 4 - Liabilities - Balance Sheet Definition
Liabilities are a company's legal debts or obligations that arise during the course of business operations and include loans, accounts payable, mortgages, deferred revenues, and accrued expenses. Current liabilities are those that will become due, or must be paid, within one year.

Chapter 5 - Equity - Balance Sheet Definition
Equity is the difference between total assets and total liabilities. The items that will appear under this section include loans from shareholders, capital stock, contributed capital, and retained earnings.

Chapter 6 - Balance Sheet Explained
An organization's balance sheet allows you to determine its liquidity and solvency as well as the ratios of its tangible and intangible assets. You can also use it to determine key ratios like the current ratio and the quick ratio. Assessing the ability of an organization to liquidate its tangible assets will give you an idea of how well it could deal with a liquidity problem.

Chapter 7 - Common-Size Analysis of Balance Sheet
Performing a common-size analysis on a balance sheet can be done either horizontally or vertically. A vertical common-size analysis expresses inventory, liabilities, and equity as a percentage of total assets. A horizontal common-size analysis compares the change year on year for each item of the balance sheet enabling you to look at how an item has changed relative to total assets.

Easy to Follow
This book starts off by explaining how a balance sheet is made up for a VERY simple company. It describes how each item has been arrived at and what it means in everyday terms. The book then goes on to describe two more complicated examples that build on each other. I found this approach easy to follow and it cleared up some things that have always puzzled me particularly about how exactly the 'assets' and 'liabilities' figures are calculated. Also, I thought I understood how depreciation was calculated, but it turns out that I didn't. I would recommend this to anyone who has not studied finance but wants to know how a balance sheet is made up and what it can tell you.
Sarah Holland

Well Presented, Organized, and Highly Informative
Coming from a financial background, I have no trouble reading a balance sheet. However, through my years working with various individuals of different backgrounds, I understand that not everyone knows what it all means and how to accurately interpret it. For that reason, I thought I would read through the 'Reading a Balance Sheet' eBook and see if I could educate myself on how to better educate others in the process of reading a balance sheet.

Since it has been so long since college, looking at a balance sheet just becomes sort of an auto-pilot exercise that doesn't require much in the way of conscious thought. Because of that, I sometimes struggle to explain aloud to others what the numbers all mean. I'm happy to say that this eBook has helped me in that regard and I think I will be far more equipped going forward to help others read the all-important balance sheet.

The first thing this book taught me is that it is very important to go back to basics when trying to read a balance sheet. Terms like assets, liabilities, equity, etc., get thrown around in business all the time, but a surprising number of people don't know exactly what they mean. Because of that, the balance sheet can be almost useless when the numbers don't represent anything inside a person's head. By backing up a few steps and ensuring that the exact meaning of all of the words on the balance sheet are understood, the numbers will suddenly start to make a lot more sense.

Another point that this book made that I had not thought about explaining is that the balance sheet is only one part of the financial picture, albeit an important one. I believe that some people look at the balance sheet and expect to find all of the answers in that one document. By bringing together the income statement and cash flow statement along with the balance sheet, someone who is learning to read this information will have a much easier time understanding what they are looking at.

I have read a few of the eBooks on this site, and have to say that this is one of the more informative and in-depth offerings that I have enjoyed. Not only does this book discuss how to read a balance sheet, but it really gets into some higher-level ideas of how to interpret the data and what that data can be used for. This is a great primer for those with very little balance sheet experience, and also is a good refresher course for the rest of us.

You will be very glad you spend your time reading this eBook. The information is well presented, organized, and highly informative. Don't hesitate to use this document as a way to educate yourself and your team members further on the importance and information that can be found in the balance sheet.
Bill Baldwin

Useful If You Are Studying Basic Accounting
Accounting has always been a subject I've abhorred. It's probably because I never enjoyed number crunching. However, as a student in business school, I had to take accounting classes to graduate. Although I've chosen Marketing as my major, I have to take various accounting courses because they will make me a well-rounded business student (according to my teacher). So last semester before my final exam for Accounting 101, I was extremely worried that I wouldn't pass the class, that was until I read Reading a Balance Sheet by Free Management Books.

My teacher was himself an accounting major and had over 25 years of experience in the subject. So he knew accounting really well, which is unfortunately the reason why he blazed through the course, leaving slow learners like myself behind. He was a part-time teacher so I could never get a hold of him for extra help. I knew I had to take it on myself and figure out a way to better understand my weakest topic in Accounting 101, which was making sense of a balance sheet.

I generally understood the concept of the balance sheet, but I always had trouble balancing totals at the end. I'd spend night and day trying to make these two figures match, but to no avail. So one night I came across the Free Management Books website and quickly downloaded the Reading a Balance Sheet PDF. To start with, I was relieved to see that this book was only around 30 pages, because I was in no mood to go through hundreds of page to understand one concept.

The positive aspect about this eBook is that it starts right from the basics, yeah, the whole liabilities + shareholder's equity = total assets. But it helped me learn other things that I had no clue about. I never knew that money owed to the company was necessarily an asset. I thought it was a liability instead, but this book clarified that point for me. Similarly, I wasn't aware that salaries were a liability because I thought they may be included in cost of goods sold.

I went on to learn about cash equivalents, which I didn't know even existed before I read this book. I learned that this heading includes petty cash, current accounts, bank certificates, money market accounts, and other short-term investments. I can now proudly say that I know what cash equivalents are inside out.

Besides these few points, there was a lot more that I learned through this free eBook . What helped me the most was the fact that it included multiple balance sheets which really made things clear for me. We were shown several examples in class, but those examples weren't explained well enough for me to understand. This eBook laid everything out in easy language rather than technical accounting jargon.

I would have never learned that equity is the difference between total assets and total liabilities because the way my teacher explained it, I didn't want to hear the word equity, let alone learn what it is. After going through this book thoroughly, I was still slightly nervous about my exam, but once I received a B- in the class, I was ecstatic. I couldn't believe that a free online book helped me pass a class that I was surely going to fail. It really would be great to see more initiatives like this taken on the net to provide help to those who need it. This book was very helpful, but not good enough to ever make me like accounting as a subject!
Darrin Weaver

Read This If You Are New to Finance
I have never studied finance and really thought that it was something that I could not handle. I felt that it was too complex. During my latest review, my supervisor informed me that she would like me to start working with the financial side as well. She told me that in the upcoming year a promotion was going to be on the table and if I wanted that spot, I had to step my game up.

Even though I have always been a hard worker and made the sales, she felt like it was time that I became a little better-rounded. She suggested that I read this book, along with the other finance books offered from this website. I came home from work and dove right into this book. I figured that I needed to get a head start if I was going to learn anything with finance in the title. When I downloaded this book I figured that it would be several hundred pages not 32. I could read the whole series of books in less time than I thought this one book would take to read. Not only was it short, but it was simplified. This book starts at the very beginning and explains everything in detail that I would need to know to read a balance sheet.

To be completely honest, I was not even sure what a balance sheet was before this book. The first part of this book describes what a balance sheet is and what it is used for. I am glad that the author included that there are two types of balance sheets, a report form and an account form. I think that it was very helpful to show an example of a balance sheet in the most simplistic way possible. The example was very easy to read and to understand. This book does a great job of starting out simple with something everyone can understand and then building on that knowledge and becoming more complex. The best part about this book is that it explains every term that it uses.

Since I am a beginner, I loved that it explained everything to me. Before this book, I was not even sure what a liability was. After reading this book, I feel like I could understand a balance sheet. It's amazing that in less than an hour I went from no knowledge about this to feeling like I could handle reading and explaining a balance sheet. If you are new to the finance world this is a book you should definitely read. I would also recommend following up this book with the other books from the finance series too. Each of the books in the finance series complements the others.
Dean Harper