In accounting terminology, "balance sheet," "statement of financial position" and "statement of financial condition" are synonyms. The investment community often evaluates publicly listed companies by their balance sheet amounts, especially long-term resources that firms rely on to thrive. Business partners, such as lenders and suppliers, also pay close attention to corporate balance sheets before signing operating agreements.
A balance sheet provides insight into a firm's solvency, emphasizing corporate assets, liabilities and net worth. Net worth, or equity capital, equals total assets minus total liabilities. Analyzing corporate statements of financial condition requires analytical dexterity and a knack for identifying economic factors that improve a company's success in the marketplace.
Corporate assets are economic resources that a company relies on to operate. Accountants separate assets into five categories: current assets, long-term investments, fixed assets or "property, plant and equipment," intangible resources and other assets. Current assets, such as inventories and accounts receivable, are resources that a firm can convert into cash within 12 months. Long-term assets, also known as tangible or fixed resources, serve in corporate operations for one year or more. Examples include land, buildings, machinery and equipment. Long-term investments include financial assets that a company purchases with a speculative motive. Examples include stocks, bonds and real estate. Intangible assets lack physical substance and include patents, trademarks and copyrights. The "Other Assets" category indicates any asset not listed elsewhere in the balance sheet (long-term accounts receivable, for example).
Liabilities are debts that a firm must repay. Debts also can be non-monetary obligations that a company must honor on time, especially if it provides a financial guarantee in a borrowing agreement on behalf of a third party. For example, a company guaranteeing the loans of subsidiaries is liable if one or all subsidiaries default. A borrower must repay a short-term debt within one year. The maturity of long-term liabilities exceeds 12 months. Companies usually repay short-term debts, such as accounts payable, with current resources. Examples of long-term debts include loans, mortgage notes and bonds payable.
Equity capital consists of investments that corporate owners make in a company. Buyers of equity are otherwise known as shareholders, equity holders or stockholders. Shareholders receive dividend payments at the end of a specific period, such as a quarter or fiscal year. They also make profits when share prices rise on securities exchanges, such as the New York Stock Exchange or Johannesburg Stock Exchange. A company's stockholders' equity balance also includes retained earnings, which represent profits that the company has not distributed to shareholders.
Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.