Balance Sheet and Income Statement

Balance Sheet

Question/Statement: Select either the balance sheet or income statement and explain how the use of it may be applied to your everyday life.

The balance sheet may be applied to everyday life in that it can be used to assess past performance, as well as to plan for future undertakings. If, for example, an individual used one's birthday as the balance sheet statement date, then the balance sheet would show assets accumulated up to that point, such as one's bank accounts, furniture, computers, 401K, equity in one's house and/or car and so forth. The individual's liabilities would include one's mortgage and car payments, credit card balances, student loans. The difference between total assets and total liabilities equals the individual's net worth.

The balance sheet may be used to evaluate an individual's performance in everyday life, for example, to see how well certain goals have been met. If, for example, an individual planned to save $25,000 by his or her thirtieth birthday, then the balance sheets shows how close he or she has come to that goal; or, if the goal has been met, or turns out to be unrealistic, the balance sheet can indicate that it is appropriate to pursue another goal. Similarly, if someone chose to use the balance sheet as a planning tool, for example, deciding to pay off one's student loans in a specified time period, then the balance sheet can be used to decide what strategy one uses to achieve that goal. The balance sheet can indicate the need to cut back on other expenses, like entertainment, or to increase his or her income by getting a second job in order to satisfy the requirements to pay off the student loan in the intended timeframe. In both scenarios, the information included in a balance sheet is used to inform the individual's decisions in the course of evaluating past performance or planning the future.

Question/Statement: Using the same concept selected above, discuss how a business manager may benefit from an understanding of this statement.

The balance sheet is a financial statement that provides a picture of a business at a given point in time, much like a snapshot. The balance sheet summarizes what a business owes and is owed as of a specific date. It shows both how a business is being funded, as well as how the organization uses those funds (Business Link, n.d.).

A balance sheet provides the following indications:

How solvent a business is

How liquid its assets are, that is, what amount is in cash or cash equivalents, or can be easily converted into cash, such as stocks or bonds

How the business is financed

How much capital is being used (Business Link, n.d.).

By understanding the balance sheet, a business manager may use it for several purposes. The balance sheet provides information that help investors, creditors and shareholders assess the worth of the business at a given moment, while at the same time giving business owners information that can be used for analyzing and improving the management of the business. If a company is trying to raise capital, most lenders or investors will want to see the balance sheet and other financial statements. In some industries, if a company wants to bid on large contracts or government contracts, the client may wish to see the company's balance sheet. Likewise, a company's owners or executives also use a balance sheet to monitor the performance of a business (Business Link, n.d.). So a business manager who understands these activities is in a better position to facilitate them to promote the business.

The balance sheet is divided into two parts that are based on the following equation; the two parts must equal each other or balance out. The primary accounting equation behind balance sheets is:

Assets = Liabilities + Shareholders' Equity

The company uses assets to operate its business, while its liabilities and equity are the sources that support those assets. Owners'equity, which is referred to as shareholders' equity in a publicly traded company, is the amount of money that is initially invested into a company along with retained earnings; together they represent a source of funding for the business (Investopedia Staff, 2009). The business manager who understands how these concepts relate to each other is better positioned to make well-informed decisions about the business' operations.

One way of interpreting the balance sheet is in terms of sources and uses of cash. Liabilities and net worth are sources of cash, representing debt owed to creditors who supply cash or its equivalent, while assets are a use of cash, which the company uses to purchase assets in order to make a profit (Huey, 2011). Understanding the relationship between sources and uses of cash helps the business manager exercise sound judgment and make good decisions about asset management.