Reading the balance sheet
Chapter concept map
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Key formulas
Balance sheet equation
Assets = Liabilities + Equity
Always balanced — the fundamental accounting identity.
Working capital
WC = Current Assets − Current Liabilities
Positive WC means the firm can meet short-term obligations.
- WC
- Working capital
Subtopic 1 / 3
Assets
The left-hand side of the balance sheet lists everything the company owns or controls. Assets are split by liquidity — how quickly they can be converted to cash.
Current assets (converted within 12 months): - Cash & equivalents: the most liquid asset — immediately usable. - Accounts receivable: amounts owed by customers who bought on credit. - Inventory: goods held for sale or raw materials awaiting production. - Prepaid expenses: cash paid in advance for a future benefit (e.g. insurance). Still an asset because value hasn't been consumed yet.
Non-current assets (held for long-term use): - Property, plant & equipment (PP&E): factories, machinery, vehicles — shown net of accumulated depreciation. - Goodwill: the premium paid when acquiring another company above its net asset value. - Long-term financial investments: equity stakes in other companies held for strategic purposes.
Worked example
A retailer's balance sheet at 31 December shows: cash €30,000, accounts receivable €45,000, inventory €80,000 (current assets = €155,000); plus a warehouse at cost €500,000 less accumulated depreciation €120,000 = net PP&E €380,000 (non-current). Total assets = €535,000.
Exam strategy
Trace each item across statements — income statement flows to retained earnings, which flows to the balance sheet.
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