What are the four uses of balance sheet?
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It has been said that Accounting is the language of business because it communicates the financial condition and performance of a business entity through the financial reports accountant produces, which are popularly known as Financial Statements. Show Aside from the fact that financial statements are required annually by the BIR and/or SEC, there are a lot of reasons why financial statements are important. Financial statements comprises of the following:
In this article, You will learn the use of balance sheet and why it’s important that you learn how to interpret it. Bookkeeping is a complicated, routinely and often redundant task which takes up significant time when performed manually or using poorly designed tools. For small amount, you can automate the process of your accounting, tax preparation and filing which will save you a lot of time and prevent errors. Check it out In simple terms, balance sheet (now referred to as Statement of Financial Position) is a financial report which shows the overall financial condition or health of the company. Elements of a Balance SheetTo be able to interpret the balance sheet, you need to understand the elements comprising it. The whole accounting cycle revolves around these three (3) important elements:
Uses of the Balance SheetBelow are some of the uses and importance of a balance sheet: 1. To Determine If Working Capital is EnoughThe balance sheet is used to determine if the business has enough working capital to sustain its operation. Working capital is the difference of current assets less current liabilities. It measures if the company still has enough current resources after deducting its due loan or obligations. If the result of computation is positive, that means the company is still doing okay. On the other hand, if the computation becomes negative, that means the company is in trouble. There’s a high risk of bankruptcy or inability to continue operating. 2. To Know the Business Net WorthNet Worth is defined as the true value of an entity. It shows how rich or poor it is. It is computed by the difference of total assets less total liabilities. In simple terms, net worth is the amount the investor/owner owns from the company after deducting all the liabilities. 3. To See If The Company Can Sustain Future OperationBy looking at the balance sheet, you can determine if the company can sustain future operation. To do this, look at the value of its non-current assets such as property, plant and equipment. If the total is higher than the current assets, it means the company has plans to sustain future operations. On the other hand, if the amount is already lower than the current assets, it can be an indication of inability to sustain future operation. 4. To Identify If There’s Possible Issuance of DividendMost business owners/investors are interested to know if when will they receive returns from their investment. Such returns can be in the form of Dividends. Dividends are issued if the company is profiting and has high amount of retained earning. The balance sheet shows the balance of retained earnings. By looking at it, you can determine if the company has enough retained earnings or not. Aside from the ones listed above, there are many other uses of balance sheet and it is really important for business owners to learn how to interpret it or have someone to interpret it for them. If you have further questions about this topic, please feel free to leave a comment. Bookkeeping is a complicated, routinely and often redundant task which takes up significant time when performed manually or using poorly designed tools. For small amount, you can automate the process of your accounting, tax preparation and filing which will save you a lot of time and prevent errors. Check it out The purpose of the balance sheet is to reveal the financial status of a business as of a specific point in time. The statement shows what an entity owns (assets) and how much it owes (liabilities), as well as the amount invested in the business (equity). This information is more valuable when the balance sheets for several consecutive periods are grouped together, so that trends in the different line items can be viewed. Evaluate Ability to Pay ObligationsThere are several subsets of information that can be used to gain an understanding of the short-term financial status of an organization. When the current assets subtotal is compared to the current liabilities subtotal, one can estimate whether a firm has access to sufficient funds in the short term to pay off its short-term obligations. Evaluate Borrowing LevelOne can also compare the total amount of debt to the total amount of equity listed on the balance sheet, to see if the resulting debt/equity ratio indicates a dangerously high level of borrowing. This information is especially useful for lenders and creditors, who want to know if the extension of additional credit might result in a bad debt. Evaluate Ability to Pay DividendsInvestors like to examine the amount of cash on the balance sheet to see if there is enough available to pay them a dividend. However, this judgment may need to be adjusted based on the need to invest additional funds in the business. Evaluate Asset ValueA potential acquirer of a business examines a balance sheet to see if there are any assets that could potentially be stripped away without harming the underlying business. For example, the acquirer can compare the reported inventory balance to sales to derive an inventory turnover level, which can indicate the presence of excess inventory. The same comparison can be applied to accounts receivable. Or, the fixed asset total can be compared to sales to derive a fixed asset turnover measure, which is then compared to best-in-class companies in the same industry to see if the fixed asset investment is too high. In short, the purpose of the balance sheet is basically to reveal the financial status of an organization, but users may focus on different information within the statement, depending on their own needs. What are the uses of balance sheet?A balance sheet gives you a snapshot of your company's financial position at a given point in time. Along with an income statement and a cash flow statement, a balance sheet can help business owners evaluate their company's financial standing.
What are three uses of balance sheet?Uses of the Balance Sheet. To Determine If Working Capital is Enough. The balance sheet is used to determine if the business has enough working capital to sustain its operation. ... . To Know the Business Net Worth. ... . To See If The Company Can Sustain Future Operation. ... . To Identify If There's Possible Issuance of Dividend.. What are the 4 balance sheets?They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders' equity.
Who uses a balance sheet and why?The balance sheet is an essential tool used by executives, investors, analysts, and regulators to understand the current financial health of a business. It is generally used alongside the two other types of financial statements: the income statement and the cash flow statement.
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