Professor/ Brandy Havens
August 25th, 2012
This paper explores the uses of financial statements, specifically the balance sheet and income statement. It explores them from a personal point of view and how the balance sheet is used in an everyday life of an individual using his own assets and liabilities and determining his net worth. As it also discusses how a manager can benefit his company by understanding the concept of a balance sheet and using it to determine how well the company is doing and its ability to pay its debts and continue in the business. This paper also discusses my understanding of the balance sheet and income statement and how they may be applied to my future position of planning to start a small business.
Select either the balance sheet or income statement and explain how the use of it may be applied to your everyday life.
The accounting balance sheet is one of the major financial statements used by accountants and business owners. The balance sheet is also referred to as the statement of financial position. The balance sheet presents a company's financial position at the end of a specified date. Some describe the balance sheet as a "snapshot" of the company's financial position at a point in time. For example, the amounts reported on a balance sheet dated December 31, 2011 reflect that instant when all the transactions through December 31 have been recorded. (2012, Averkamp)
Because the balance sheet informs the reader of a company's financial position as of one moment in time, it allows someone—like a creditor—to see what a company owns as well as what it owes to other parties as of the date indicated in the heading. The major components of the balance sheet are:
Owner's (Stockholders') Equity. (2012, Averkamp) People are like businesses, we have assets (personal savings, investments, etc) and liabilities (mortgage payments, credit card debt, etc). The balance sheet will provide a snapshot of our net worth, or balance of your assets and liabilities. Calculating my personal net worth is the best way to know exactly what my starting point is, in any financial plan I develop. (Cochrane)
Cash (in the bank, money market accounts, or CDs).
All investments (mutual funds, college savings accounts, individual securities).
Home value (the resale value of your home).
Automobile value (the resale value of your car).
Personal Property Value (resale value of jewelry, household items, etc).
The sum of all of those values is the total value of my assets.
Remaining mortgage balance.
Any other personal loans.
Credit card balances.
The sum of all of the money I owe is my liabilities. As I start to pay down my debt, my total liabilities will decrease.
The difference between my assets and my liabilities is my net worth.
Using the same concept selected above, discuss how a business manager may benefit from an understanding of this statement.
Having a balance sheet is just good business management. Every good manager should know where the business is financially. The balance sheet is the place to start determining the financial health of the business. Comparing balance sheets over time gives the manager the information to know whether his decisions are moving the operation in the right direction to fulfill his goals (2003, Duckworth, Bevers, Borchardt & Bennett). It is also an ever-changing document on which is constantly updated with new assets the company acquires or new liabilities that the company undertakes. When updated frequently, the balance sheet will give potential lenders and investors the information they need to make informed decisions about lending the company money or other resources. Also a current balance sheet even reflects the company's ability to collect and pay debts over time. This is extremely