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Balance Sheet & Accounting Equation Vocabulary

Accounting Equation & Balance Sheet

  • Balance sheet = snapshot of financial position at a specific date.
  • Core relationship: \text{Assets} = \text{Liabilities} + \text{Owners'\ Equity} (must always balance after every transaction).
  • Users analyze balance sheet for:
    • Liquidity (ability to meet short-term obligations).
    • Solvency (long-term debt sustainability).

Assets

  • Economic resources owned/controlled by the firm; reported in amounts.
  • Listed by liquidity (cash first).
    • Current assets: expected to convert to cash within 1 year.
    • Non-current (long-term) assets: conversion expected after 1 year.
  • Common asset categories:
    • Cash & cash equivalents
    • Marketable securities
    • Accounts receivable
    • Inventory
    • Prepaid expenses
    • Land, buildings, equipment (PP&E)
    • Intangible assets (patents, licenses)
    • Goodwill (excess purchase price over fair value of net assets acquired)
    • Right-of-use assets (leased property/equipment)
  • Example (Meta 12/31/23): 85.365\text{ B} current assets; 144.258\text{ B} non-current assets.

Liabilities

  • Obligations to pay cash, transfer assets, or provide services.
  • Split by due date:
    • Current liabilities: due within 1 year (e.g., accounts payable, accrued expenses, current portion of leases).
    • Long-term liabilities: due after 1 year (e.g., bonds, non-current lease liabilities).
  • Common liability types:
    • Accounts payable
    • Taxes payable
    • Mortgage/long-term debt
    • Unearned revenue
  • Valuation often judgment-heavy (e.g., environmental cleanup costs).
  • Example (Meta 12/31/23): 31.960\text{ B} current; 44.485\text{ B} long-term; total 76.455\text{ B}.

Owners' Equity (Stockholders' Equity)

  • Residual interest after liabilities: \text{Owners'\ Equity} = \text{Assets} - \text{Liabilities}.
  • Main components:
    • Capital stock (common stock + additional paid-in capital): cash/other assets invested by owners.
    • Retained earnings: cumulative profits kept in business minus dividends.
    • Other equity items (e.g., accumulated other comprehensive income).
  • Note: Retained earnings ≠ cash; funds may be tied up in other assets.
  • Example (Meta 12/31/23): capital contributed 73.253\text{ B}; retained earnings 82.070\text{ B}; total equity 153.168\text{ B}.

Classified & Comparative Balance Sheets

  • Classified: separates current vs long-term assets and liabilities, enhancing liquidity analysis.
  • Comparative: presents multiple years side-by-side for trend assessment.
  • Quick liquidity measure: \text{Current Assets} - \text{Current Liabilities} (Meta: +53.405\text{ B} at 12/31/23).
  • Quick solvency measure: \text{Total Assets} - \text{Total Liabilities} (Meta: +153.168\text{ B}$$ at 12/31/23).