I. Read the text and describe the major sections of the balance sheet.

A balance sheet describes the resources that are under a company’s control on a specified date and indicates where these resources have come from. It consists of three major sections: (1) the assets: valuable rights owned by the company: (2) the liabilities: the funds that have been provided by outside lenders and other creditors in exchange for the company’s promise to make payments or to provide services in the future; and (3) the owners’ equity: the funds that have been provided by the company’s owners or on their behalf.

The list of assets shows the forms in which the company’s resources are lodged; the lists of liabilities and the owners’ equity indicate where these same resources have come from. The balance sheet, in other words, shows the company’s resources from two points of view, and the following relationship must always exist: total assets equal total liabilities plus total owners’ equity. This formula is the basis for balance sheet.

This same identity is also expressed in another way: total assets minus total liabilities equals total owners’ equity. In this form, the equation emphasizes that the owners’ equity in the company is always equal to the net assets (assets minus liabilities). Any increase in one will inevitably be accompanied by an increase in the other, and the only way to increase the owners’ equity is to increase the net assets.

Assets are ordinarily subdivided into current assets and noncurrent assets. The former include cash, amounts receivable from customers, inventories, and other assets that are expected to be consumed or can be readily converted into cash during the next operating cycle (production, sale, and collection). Noncurrent assets may include noncurrent receivables, fixed assets (such as land and buildings), and long-term investments.

The liabilities are similarly divided into current liabilities and noncurrent liabilities. Most amounts payable to the company’s suppliers (accounts payable), to employees (wages payable), or to governments (taxes payable) are included among the current liabilities. Noncurrent liabilities consist mainly of amounts payable to holders of the company’s long-term bonds and such items as obligations to employees under company pension plans. The difference between total current assets and total current liabilities is known as net current assets, or working capital. A simple balance sheet is shown in Table 1.

Table 1: Any Company, Inc.: Balance Sheet as of Dec. 31, 20___

assets liabilities and owners’ equity

Current assets Current liabilities

Cash $ 100 Wages payable $ 20

Marketable securities 50 Accounts payable 160

Inventories 180 Total current liabilities $ 180

Total current assets $ 480 Deferred taxes 10

Long-term bonds payable 70

Total liabilities $ 260

Long-term investments 70 Owners’ equity

Plant and equipment Common stock $ 100

Original cost $ 300 Additional paid-in capital 150

Less: accumulated 110 190 Retained earnings 230

depreciation Total owners’ equity 480

T otal assets $ 740

Total liabilities and $ 740

owners’ equity

II. Re-read the text to find the answers to these questions.

1. What does a balance sheet describe?

2. How many major sections does it consist of? What are they?

3. How are valuable rights owned by the company called?

4. What are the liabilities?

5. The funds that have been provided by the company’s owners or on their behalf are the owners’ equity, aren’t they?

6. What does the list of assets show?

7. How are assets subdivided?

8. What do current assets include?

9. What may noncurrent assets include?

10. How are the liabilities divided?

11. What is working capital?