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Formulas
Balance sheet equation
Always balanced — the fundamental accounting identity.
Working capital
Positive WC means the firm can meet short-term obligations.
Part 1 of 3
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
For the exam
Study assistant
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Why is this the correct answer?
Eliminate any option that contradicts something stated directly in the lesson, then check which one actually follows from the rule you just learned. Tell me which option confused you and I'll point to the exact line.
Exam strategy
Trace each item across statements — income statement flows to retained earnings, which flows to the balance sheet.
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