Balance Sheet

The Balance Sheet—or Statement of Financial Position—is a core financial statement that reports a snapshot of a company’s assets, liabilities, and shareholders’ equity at a particular point in time.

In practice, the balance sheet offers insights into the current state of a company’s financial position at a predefined point in time, akin to a snapshot.

The composition of the balance sheet is composed of three pieces, which are assets, liabilities, and shareholders’ equity.

• The balance sheet is a financial statement that provides a snapshot of a company’s assets, liabilities, and shareholders’ equity at a specific point in time.
• The fundamental accounting equation—Assets = Liabilities + Shareholders’ Equity—underpins the balance sheet and the interconnections among each line item.
• The assets section is listed in descending liquidity and separated into current assets and non-current assets.
• The liabilities section is listed in order of how close their due dates are and split between current liabilities (12 months).
• The shareholders’ equity section represents the residual value—or “net worth”—remaining upon deducting total liabilities from the total assets of a company.
• The balance sheet offers practical insights into a company’s current financial position and is used to perform ratio analysis to measure operating efficiency, liquidity, solvency, and leverage risk.

Table of Contents

• Balance Sheet Template: Standard Format
• Balance Sheet Formula
• How to Prepare the Balance Sheet for Beginners
• Sample Balance Sheet Template: Apple (AAPL)
• How to Analyze the Balance Sheet
• How are the Financial Statements Linked?
• Balance Sheet Calculator — Excel Template
• 1. Basic Balance Sheet Template Build
• 2. Balance Sheet Calculation Example

Balance Sheet Template: Standard Format

The balance sheet reflects the carrying values of a company’s assets, liabilities, and shareholders’ equity at a specific point in time.

Conceptually, a company’s assets refer to the resources belonging to the company with positive economic value, which must have been funded somehow.

The two funding sources available for companies are liabilities and shareholders’ equity, which reflect how the resources were purchased.

In simple terms, the balance sheet—also known as the “statement of financial position”—provides a comprehensive overview of a company’s assets (“what is owned”) and liabilities (“what is owed”) in a given period.

The difference between a company’s total assets and total liabilities results in shareholders’ equity (or “net assets”).

The standard format and three components of the balance sheet are each described in the following illustrative chart:

• Total assets refer to a company’s resources with positive economic value that can either be sold for money if liquidated or used to generate future monetary benefits.
• Cash and cash equivalents, such as short-term investments, are a store of monetary value and can earn interest.
• Accounts receivable (A/R) are payments owed by customers who had paid on credit.
• Inventory comprises raw materials used in the production process, work-in-process (WIP) goods, and finished goods currently available for sale.
• Fixed assets (PP&E) are purchased via capital expenditures (Capex) because long-term assets, such as machinery, are anticipated to provide positive economic utility in excess of one year (>12 months).

• Total liabilities refer to the unsettled obligations owed to third parties that represent future cash outflows—or, more specifically, the “external” source of financing available to a company to fund the purchase and maintenance of assets.
• Unlike assets, liabilities are unsettled obligations to another party in the future and represent a future cash outflow to third parties, such as lenders that provided debt financing and the unmet payments still owed to suppliers or vendors.

• Shareholders’ equity is the difference between a company’s assets and liabilities.
• Conceptually, the remaining value if all assets were liquidated and outstanding debt obligations were settled reflects the net worth (or shareholders’ equity).
• Equity represents the capital invested into the company and is the “internal” source of capital.
• Similar to liabilities, equity is used to fund the purchase of assets and day-to-day operations, such as working capital needs.
• Equity capital providers can range from the founders of the company, if it is bootstrapped, to institutional investors (e.g. venture capital firms, growth equity firms, and private equity firms).
• The retained earnings represent the accumulated net profits kept by a company since inception rather than issuances of common or preferred dividends to shareholders.

Balance Sheet Formula

The fundamental accounting equation states that a company’s assets must be equal to the sum of its liabilities and shareholders’ equity.

If the fundamental accounting equation is not true in a financial model—i.e. the balance sheet does not “balance”—the financial model contains an error in all likelihood.

The three components of the equation will now be described in further detail in the following sections.

Once complete, we’ll undergo an interactive training exercise in Excel, where we’ll practice building a balance sheet template using the historical data pulled from the 10-K filing of Apple (AAPL).

How to Prepare the Balance Sheet for Beginners

1. Assets Section (Current vs. Non-Current)

Assets describe resources with economic value that can be sold for money or have the potential to provide monetary benefits someday in the future.

The assets section is ordered in terms of liquidity, i.e. line items are ranked by how quickly the asset can be liquidated and turned into cash on hand.

On the balance sheet, a company’s assets are separated into two distinct sections:

1. Current Assets ➝ The short-term assets that can or are expected to be converted into cash within one year (
2. Non-Current Assets ➝ The long-term assets expected to provide economic benefits to the company in excess of one year (>12 months).

While current assets can be converted into cash within a year, liquidating non-current assets, such as fixed assets (PP&E), can be a time-consuming process.

Furthermore, a substantial discount is normally necessary to find a suitable buyer to sell the fixed asset in the open markets.

The most common current assets are defined in the table below.

• The starting line item of the current assets section is cash and cash equivalents in practically all cases.
• Cash equivalents refer to highly liquid, cash-like securities, such as commercial paper and certificates of deposits (CDs).

• Marketable securities are short-term debt or equity securities owned by a company that can be liquidated to cash relatively quickly.
• While often separated on the balance sheet, marketable securities can be consolidated with the cash and cash equivalents line item for modeling purposes.

• Accounts receivable represents the unfulfilled payments owed to a company by its customers for products or services already delivered to them.
• Revenue is recognized on the income statement in the period at which the payment was “earned,” but the accounts receivable line item is impacted since the customer paid on credit (i.e., an “IOU” from customers).

• Inventory refers to the materials used to produce the end product, such as raw materials, work-in-progress (WIP), and finished goods that are marketable and waiting to be sold.
• Inventory and accounts receivable are perceived as the most liquid current assets, aside from cash and cash equivalents, of course.

• Prepaid expenses describe the early payments issued in advance for goods and services that will not be provided until a later date.
• The most common examples of prepaid expenses are utilities, insurance, and rent.

The next section consists of non-current assets, which are described in the table below.

• PP&E, or fixed assets, are the long-term investments that are core to a company’s revenue model, such as buildings, machinery, tools, and vehicles.
• Contrary to current assets, PP&E are long-term assets that are expected to contribute positive economic utility on behalf of the company in excess of twelve months (>1 year).

• Intangible assets refer to a company’s non-physical assets, such as patents, trademarks, intellectual property (IP), and customer lists.
• Intangible assets are not permitted to be recognized on the balance sheet until an acquisition occurs.
• The process of purchase price allocation (PPA) is when the value of intangibles is recognized for bookkeeping purposes.

• Goodwill is an intangible asset created to capture the excess of the purchase price over the fair market value (FMV) of an acquired asset.
• Goodwill reflects the purchase premium paid in M&A (i.e. Goodwill = Purchase Price – Fair Value of Acquired Asset)
• Contrary to certain identifiable intangible assets, publicly traded companies cannot amortize goodwill, but management can periodically conduct a review for goodwill impairment.

2. Liabilities Section (Current vs. Non-Current)

Similar to the order in which assets are displayed, liabilities are listed in terms of how near-term the cash outflow date is, i.e. the near-term liabilities coming due on an earlier date are listed at the top.

Liabilities are also separated into two parts on the basis of their maturity date:

• Current Liabilities ➝ Short-term liabilities are expected to be paid off within one year (e.g. accounts payable)
• Non-Current Liabilities ➝ Long-term liabilities are not likely to come due for at least one year (e.g. long-term debt).

The most frequent current liabilities that appear on the balance sheet are the following:

• Accounts payable represent the unpaid bills owed to suppliers and vendors for services or products already received yet paid for on credit by the company.
• Conceptually, accounts payable—or “payables”—measure the outstanding bills invoiced to a company that remains unpaid (i.e., not yet paid for).

• Accrued expenses are expenses incurred by a company, such as employee compensation or utilities — however, the payment has not yet been issued.
• The recognition of accrued expenses is often a pending invoice still waiting to be processed (and issued).

• Short-term debt securities have maturity dates that are coming due within the next twelve months (including the current portion of long-term debt).
• Common examples of short-term debt include the revolving credit facility (“revolver”) and commercial paper.

• Long-term debt represents any debt obligations with maturity dates not due for at least one year.
• The maturity of long-term debt exceeds twelve months (>12 months).

• Deferred revenue, or “unearned revenue,” represents customer payments a company receives in advance for goods or services not yet delivered.
• The concept of deferred revenue is the reverse of accounts receivable because the company collects cash from the customer before the revenue is “earned” via the delivery of the good or service.

• Deferred taxes are created from temporary timing discrepancies between the tax expense recorded under GAAP and the actual taxes paid.
• The temporary timing differences between book and tax accounting eventually unwind over time to zero.

• Lease obligations are contractual agreements that provide the company with the right to lease a fixed asset for an agreed-upon duration in exchange for regular payments.

3. Shareholders Equity Section

The second source of funding—other than liabilities—is shareholders equity (or “stockholders equity”), which consists of the following line items.

• Common stock represents a share of ownership in a company and can be issued when raising capital from outside investors in exchange for equity.

• APIC captures the amount received in excess of the par value from the sale of preferred or common stock.

• Preferred stock is a form of equity capital often considered a hybrid investment, as it blends features of common equity and debt.

• Treasury stock is a contra-equity account that stems from a company repurchasing shares that were previously issued but were repurchased by the company as part of a continuous or one-time share buyback.
• The repurchased shares are no longer available to be traded in the open markets post-buyback.

• The retained earnings measure the cumulative earnings kept by a company since its date of formation.
• The retained earnings balance represents the profits collected to date and not issued as dividends to compensate shareholders.

• Other comprehensive income (OCI) is more of a “catch-all” line item for miscellaneous items.
• Foreign currency translation adjustments (FX) and unrealized gains or losses on available-for-sale securities are common items included within the OCI line item.

Sample Balance Sheet Template: Apple (AAPL)

The balance sheet of Apple (AAPL), a global consumer electronics and software company, for the fiscal year ending 2021 is shown below.

Sample Apple Balance Sheet Template (Source: AAPL 10-K)

How to Analyze the Balance Sheet

While the financial statements are closely intertwined and necessary to understand a company’s financial health, the balance sheet is particularly useful for ratio analysis.

The following chart contains some of the most common metrics used in practice to analyze a company’s balance sheet.

• Capital efficiency ratios are used alongside the income statement to measure the efficiency at which a company’s management allocates capital into profitable investments and projects.
• The three main capital efficiency ratios are the return on invested capital (ROIC), return on equity (ROE), and return on assets (ROA).
• Companies with a sustainable economic moat tend to exhibit higher returns relative to their competitors, which stems from sound management decisions regarding capital allocation, strategic initiatives like geographic expansion, and the timely avoidance of poorly invested capital.

• Activity ratios, or “turnover ratios,” measure how effectively management utilizes the company’s asset base and investor capital.
• Companies with higher activity ratios relative to their peers should be more cost-effective, resulting in higher profit margins and more capital available for reinvestment in operations or future growth — all else being equal.
• The most common activity ratios include the total asset turnover ratio, fixed asset turnover ratio, and working capital turnover ratio.

• Liquidity ratios are short-term risk measures that compare a company’s current asset base to its current liabilities.
• The more liquid, cash-like assets a company has, the lower the implied liquidity risk.
• The current and quick ratios are the two most common liquidity ratios.

• Solvency ratios assess a company’s ability to meet its long-term financial obligations, specifically the repayment of debt principal and interest.
• Unlike liquidity ratios, solvency ratios are more oriented toward measuring a company’s sustainability in fulfilling its long-term obligations.
• The three most practical solvency ratios are the debt-to-equity ratio (D/E), debt-to-assets ratio, and equity ratio.

• Leverage ratios ensure that the company can continue to operate as a “going concern” by assessing credit risk.
• Overreliance on debt is the most common catalyst for financial distress and insolvency among corporations (i.e. the debt burden is unmanageable relative to the free cash flow of the borrower).
• Management must carefully adjust the company’s capital structure to reduce the risk of default and avoid creditors forcing the borrower into reorganization (Chapter 11) or liquidation (Chapter 7).
• The main leverage ratios used in practice are the total leverage ratio (Total Debt ÷ EBITDA), net leverage ratio (Net Debt ÷ EBITDA), and senior leverage ratio (Senior Debt ÷ EBITDA).

How are the Financial Statements Linked?

The three core financial statements—income statement, balance sheet, and cash flow statement—are intricately connected and collectively present a comprehensive view of a company’s current financial condition.

• Income Statement ➝ The income statement, often used interchangeably with the term “profit and loss statement (P&L)”, records the revenue, costs, expenses, and net income (the “bottom line”) for a specified period. The net income, or accounting profitability, flows in as the starting line item on the cash flow statement (CFS).
• Cash Flow Statement ➝ The cash flow statement is composed of three sections—the cash from operating, investing, and financing activities—with each section reconciling the company’s reported net income to track the actual movement of cash in the stated period (i.e. the “inflow” and “outflow” of cash).
• Balance Sheet ➝ The balance sheet, or statement of financial position, presents a snapshot of a company’s assets, liabilities, and shareholders’ equity at a specific point in time. The cash flow statement captures the changes in working capital line items to ensure the reflected cash balance is the actual cash balance available at the end of the given period.

The retained earnings line item is the centerpiece that ties the three financial statements together.

Conceptually, retained earnings reflect the cumulative earnings kept by a company since its inception rather than distributing excess funds in the form of shareholder dividends.

The ending retained earnings balance recognized on the balance sheet equals the beginning balance plus net income, net of any dividend issuances to shareholders.

The ending cash balance on the cash flow statement (CFS) must match the cash balance recognized on the balance sheet for the current period.

Balance Sheet Calculator — Excel Template

We’ll now move on to a modeling exercise, which you can access by filling out the form below.

1. Basic Balance Sheet Template Build

Suppose we’re tasked with building a 3-statement model for Apple (NASDAQ: AAPL) and are currently preparing the company’s historical balance sheet data.

Using the screenshot from earlier, we’ll enter Apple’s historical balance sheet into Excel.

The hard-coded inputs are entered in blue font, while the calculations (i.e. the ending total for each section) are in black font.

Why? The color formatting abides by general financial modeling best practices, which make building a financial model easier for the one creating the model and for purposes of auditing.

However, rather than copying every data point in the same format as reported by Apple in its public filings, we must make discretionary adjustments that we deem appropriate for modeling purposes.

• Marketable Securities ➝ For instance, marketable securities are consolidated into the cash and cash equivalents line item because the underlying drivers are identical.
• Short-Term Debt ➝ The short-term portion of Apple’s long-term debt is consolidated into one combined line item since the mechanics of the debt schedule roll-forward are the same.

However, that does not mean all remotely similar line items should be combined, as seen in the case of Apple’s commercial paper.

Commercial paper is a form of short-term debt with a specific purpose, different from long-term debt. Since commercial paper is a debt-like security, certain financial models consolidate commercial paper with the revolving credit facility (“revolver”) line item.

2. Balance Sheet Calculation Example

Once Apple’s historical data is input in our Excel template, with the proper adjustments to streamline our financial model, we’ll calculate the profit metrics denoted in black font as a standard modeling convention (and “best practice”).

• Blue Font ➝ Hardcoded Input
• Black Font ➝ Calculation (or Cell Reference)

The formula for each bolded cell is as follows:

• Total Current Assets = Cash and Cash Equivalents + Accounts Receivable, net + Inventories + Other Current Assets
• Total Assets = Total Current Assets + Property, Plant and Equipment, net + Other Non-Current Assets
• Total Current Liabilities = Accounts Payable + Other Current Liabilities + Commercial Paper + Deferred Revenue
• Total Liabilities = Total Current Liabilities + Long-Term Debt + Other Non-Current Liabilities
• Total Shareholders’ Equity = Common Stock and APIC + Retained Earnings + Other Comprehensive Income / (Loss)

Note that in our basic balance sheet template, the “Total Assets” and “Total Liabilities” line items include the values of the “Total Current Assets” and “Total Current Liabilities”, respectively.

In other cases, the balance sheet presentation will be divided into two parts: “Current” and “Non-Current.”

Upon completion, the final step is to ensure the fundamental accounting equation remains true by subtracting total assets from the sum of the total liabilities and shareholders’ equity, which comes out to zero, confirming our balance sheet is indeed “balanced.”

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